How future rental income can help you buy an investment property

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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.
Assume the appraiser's opinion of market rent is $3,000 (Gross rent).
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.
Based on a gross monthly rent of $3,000 and a 25% vacancy and maintenance adjustment, the lender would consider $2,250 as the estimated future rental income for qualifying purposes.
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.
If your monthly mortgage payment (PITI) is $3000, and the adjusted rent is $2,250.
$2,250 (Adjusted rent) - $3,000 (Mortgage payment) = -$750 (Net renal loss)
$750 is the monthly investment property debt. In this case, the future rental income reduced your mortgage debt from $3,000 to $750, lowering your debt-to-income ratio (DTI) and making it easier to qualify for the mortgage.
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.
If your adjusted rental income is $2,250, and your mortgage payment is $2,000.
$2,250 (Adjusted rent) - $2,000 (Mortgage payment) = $250 (Net rental 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