How future rental income can help you buy an investment property

When buying an investment property, you can use a portion of the future rental income to help you get approved for the mortgage.

However, only some real estate investors can use the property's rental income to offset the mortgage payment.

In this article, I'll explain how to calculate future rental income and when you can use it to buy an investment property.   

What is an investment property's future rental income?

Future rental income is the cash you expect to collect from tenants in the months ahead. Sometimes, the investment property's future rental income can help you get approved for a mortgage. 

Investment property refers to residential real estate you purchase to generate rental income, capital appreciation, or both. 

• Down payment for investment properties

Depending on the circumstances, you can use the future rental income from an investment property to offset the mortgage payments, making it easier to meet the lender's debt-to-income ratio requirements and get approved for financing.

To determine the amount of future rental income you can use from the investment property, lenders consider the following:

• Whether you're a homeowner or have a current housing expense
• Your property management experience

Investment property mortgage rates are higher than those for a primary residence. Check today's rates and see how much buying an investment property costs. 

How do lenders determine rental income for an investment property? 

Lenders review current lease agreements and a real estate property appraisal report to determine rental income for investment properties.

Lease agreements: After you and the seller sign the real estate sales contract, send the lender a copy of the property's current lease agreement showing the actual rent. The lender only needs a lease if the seller rents the property or transfers the lease to the buyer.

Property appraisal: Next, the lender orders a property appraisal. The appraiser provides the lender with an opinion of the monthly market rent based on professional judgment and analysis of relevant data. It's the rental income the property could fetch in the current market under ideal circumstances.

Lenders typically use the appraiser's opinion of the market rent to determine the property's gross rental income.

• How to calculate future rental income from a departing residence

How to calculate rental income for an investment property

Lenders calculate rental income for investment properties by considering the property's potential rental revenue and vacancy and maintenance expenses.

Calculate rental income for an investment property by multiplying the gross monthly rent by 75%. Subtract 25% for vacancy losses and maintenance expenses.

1. Start with the gross monthly rent.

The gross monthly rent is the appraiser's opinion of the market rent from the appraisal report.

2. Apply the vacancy and maintenance percentage.

Multiply the gross monthly rent by 25% to get the potential vacancies and maintenance costs.

3. Calculate the adjusted monthly rent.

Subtract the vacancy and maintenance cost from the gross monthly rent.

How rental income can help you buy an investment property

You can use the rental income from an investment property to reduce the mortgage payment, making it easier to get approved.

Subtract the mortgage payment of principal, interest, taxes, and insurance (PITI) from the adjusted rental income. If the result is negative, add the net rental loss as a debt.

Future rental income reduces your mortgage debt, lowering your debt-to-income ratio (DTI) and making it easier to qualify for a mortgage. 

• How can future rental income help me buy a 2-to-4-unit property?

Who can use rental income when qualifying for a mortgage?

To determine the amount of future rental income you can use from the investment property, lenders consider the following:

• Whether you're a homeowner or have a current housing expense
• Your property management experience

Current housing expense:  You must own a principal residence or have a current housing expense to use the rental income from an investment property to offset the mortgage payment.

A housing expense, particularly timely payments on existing mortgages or rent, gives lenders confidence in your ability to handle the ongoing commitment of a mortgage payment.

First-time homebuyers living rent-free may not use an investment property's rental income when qualifying for a mortgage. Instead, they must have enough income to meet the lender's debt-to-income ratio requirements without subtracting the adjusted rental income from the mortgage payment.

Property management experience: You must have at least one year of property management experience before adding the net rental income from an investment property to your qualifying income.

Property management experience is at least one year of receiving rental income on another property. Borrowers with less than one year of property management experience may not add the net rental income to their qualifying income. 

Suppose the adjusted rental income minus the mortgage payment is positive. In that case, you can add the positive cash flow to your qualifying income.

Mortgage rules for rental income

The following sources outline the general rental income eligibility requirements for conventional conforming mortgages. 

• Fannie Mae rental income
• Freddie Mac rental income
• Calculating rental income
• Rental income calculation worksheets