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Hi All! I'm trying to figure out when do lenders begin to count your rental incomes as income when getting a mortgage on a house. To be more clear on what I am trying to ask, I have a home that I bought a few months ago with a mortgage and I would like to rent it out for $1,800. Let's say Home A. The mortgage on Home A is $1,500. I also have another home, Home B, with a mortgage of $1,600 that is for me to live in. I would like to buy another home, Home C, but I cannot afford another mortgage because I have two mortgages (Home A & B) totaling $3,100 and my gross income is $5,500, so my debt to income ratio is too high to get another mortgage.
So if there are any experienced renters out there or loan officers, I would like to know when would lenders begin counting Home A as rental income and not be counted against me as debt. Instead, I'd have a gross income of $5,800 ($300 additional profit from rental income) and only $1,600 debt. I've heard many things from lenders count 75% of the rental income as income after a couple of months to it takes at least two years of rental income history on the house before they consider it as rental income. By the way, I live in Dallas, Texas.
Any clarification and explanation would be greatly appreciated. Thank you guys in advanced.
Yes you are right. They usually count 75% of rent after 2 years of history and it should show in your tax return.
Also, renting out a house for $1800 with a $1500 mortgage is a not a wise investment. If you have one issue with a hvac,water heater,roof etc will eat up your 1-2 years worth of cash flow and you will not break even. Rule of thumb is the rent should be at least 1% of the home value which it is tough to achieve and a bad time to get into real estate investing given what DFW is going through now. Wait a couple of years when there will be a correction while you save up some money and learn real estate investing.
Yes you are right. They usually count 75% of rent after 2 years of history and it should show in your tax return.
Also, renting out a house for $1800 with a $1500 mortgage is a not a wise investment. If you have one issue with a hvac,water heater,roof etc will eat up your 1-2 years worth of cash flow and you will not break even. Rule of thumb is the rent should be at least 1% of the home value which it is tough to achieve and a bad time to get into real estate investing given what DFW is going through now. Wait a couple of years when there will be a correction while you save up some money and learn real estate investing.
This is great advice all around.
Also, OP: Remember that you need to live in a house that you took out a primary residence mortgage on for at least a year or so before moving out and converting it to a rental. I also think the sweet spot for investing is at a lower price point than what you've described.
Yes you are right. They usually count 75% of rent after 2 years of history and it should show in your tax return.
Also, renting out a house for $1800 with a $1500 mortgage is a not a wise investment. If you have one issue with a hvac,water heater,roof etc will eat up your 1-2 years worth of cash flow and you will not break even. Rule of thumb is the rent should be at least 1% of the home value which it is tough to achieve and a bad time to get into real estate investing given what DFW is going through now. Wait a couple of years when there will be a correction while you save up some money and learn real estate investing.
Depends. First of all, most would disagree that there will be a correction in DFW home prices. Secondly, in the long term (over the next 30 years) you could still come out ahead with a $300 per month profit. Many landlords buy their homes in cash or with 15 year mortgages which allows them to make much more of a profit over a long period of time since there aren't as many payments on interest cutting into the profits.
Depends. First of all, most would disagree that there will be a correction in DFW home prices. Secondly, in the long term (over the next 30 years) you could still come out ahead with a $300 per month profit. Many landlords buy their homes in cash or with 15 year mortgages which allows them to make much more of a profit over a long period of time since there aren't as many payments on interest cutting into the profits.
1. There will almost certainly be a correction in terms of the cost to buy vs cost to rent ratio. It is advisable to buy rental properties when this ratio is low. Right now it is extremely high. Also, "most" is irrelevant if we are talking about average folks or just folks on this forum. What do most professional economists think? My guess is that most of them at least think the current rates of appreciation are unsustainable.
2. Yes, you can possibly still make some money renting out properties for $1800 that you are paying $1500 per month on, but it's bad investing. Buying with cash can make almost any bad deal look go, so you need to calculate the roi of the deal. I don't think this scenario would come out looking good relative to risk and opportunity cost.
Yes you are right. They usually count 75% of rent after 2 years of history and it should show in your tax return.
Also, renting out a house for $1800 with a $1500 mortgage is a not a wise investment. If you have one issue with a hvac,water heater,roof etc will eat up your 1-2 years worth of cash flow and you will not break even. Rule of thumb is the rent should be at least 1% of the home value which it is tough to achieve and a bad time to get into real estate investing given what DFW is going through now. Wait a couple of years when there will be a correction while you save up some money and learn real estate investing.
I've heard different answers from another forum. Someone in that forum who is supposedly a loan officer said the 2 years of history is no longer a requirement and lenders are much more laxed nowadays. They only require deposit, proof of income, and a signed lease to consider 75% of rent. I remember hearing the 2 years of history as well but that was from 4 years ago. Where did you hear the 2 years of history from and when was that?
As far as any issues with the house, I'm not too worried. I'm very to lucky to have my dad around because he is a general contractor and knows how to fix everything from roof to plumbing to electrical. I'm also a DIY type of guy and would youtube anything I don't know how to fix.
Quote:
Originally Posted by Wittgenstein's Ghost
This is great advice all around.
Also, OP: Remember that you need to live in a house that you took out a primary residence mortgage on for at least a year or so before moving out and converting it to a rental. I also think the sweet spot for investing is at a lower price point than what you've described.
Yes that's definitely something I need to consider. I would like to rent it out as soon as possible and just pay the extra interest rate for a rental property, but that would eat into the monthly rent. So there's some things to consider
1. There will almost certainly be a correction in terms of the cost to buy vs cost to rent ratio. It is advisable to buy rental properties when this ratio is low. Right now it is extremely high. Also, "most" is irrelevant if we are talking about average folks or just folks on this forum. What do most professional economists think? My guess is that most of them at least think the current rates of appreciation are unsustainable.
2. Yes, you can possibly still make some money renting out properties for $1800 that you are paying $1500 per month on, but it's bad investing. Buying with cash can make almost any bad deal look go, so you need to calculate the roi of the deal. I don't think this scenario would come out looking good relative to risk and opportunity cost.
1. I'm not an economist, but many on this forum who actually are I believe have stated that the current rates of appreciation are sustainable. It's up for debate though, nobody really knows for sure. Being a landlord is always a risky venture, and investing in index funds is probably a safer bet for someone who knows nothing about it.
2. There are a million factors in play beyond the monthly payments and the rental income, so I don't think you can say a $1800 rent for $1500 monthly payments is always bad investing. Are you looking for a profit over the next 5 years, or 40 years? What kind of mortgage (if any) is being used? What's the age and condition of the home? When was the last time it was updated? Where is the location? What are the property taxes, and how much are they increasing? How much is your taxable income? How are you screening for tenants? Are you utilizing a property management company, and if so what do they charge? All these things need to be considered.
I've heard many things from lenders count 75% of the rental income as income after a couple of months to it takes at least two years of rental income history on the house before they consider it as rental income. By the way, I live in Dallas, Texas.
Any clarification and explanation would be greatly appreciated. Thank you guys in advanced.
Depends on a lender, whether it is 2 years wait or 2 months. I have seen a lender telling me about a wait for 2 years before they can count that income ( mostly big name banks ) and also seen a lender who just requires 2 months of history ( local lender or small regional bank usually ), you need to talk to different lenders and find out.
1. I'm not an economist, but many on this forum who actually are I believe have stated that the current rates of appreciation are sustainable. It's up for debate though, nobody really knows for sure. Being a landlord is always a risky venture, and investing in index funds is probably a safer bet for someone who knows nothing about it.
What economists here have said the current rates of appreciation are sustainable? I might be sympathetic to the argument that there won't be a big crash or that prices will simply level off rather than decline, but the idea that DFW-wide housing can continue to appreciate at a rate of almost 9% seems crazy. The economy isn't growing by 9%. The population is growing closer to 3%. Why should housing go up 9% every year? And that's just the DFW-wide appreciation rate. Many northern suburbs have seen even higher rates.
I don't think you could find a professional economist with any sort of national platform who thinks that is genuinely sustainable.
Quote:
Originally Posted by BongoBungo
2. There are a million factors in play beyond the monthly payments and the rental income, so I don't think you can say a $1800 rent for $1500 monthly payments is always bad investing. Are you looking for a profit over the next 5 years, or 40 years? What kind of mortgage (if any) is being used? What's the age and condition of the home? When was the last time it was updated? Where is the location? What are the property taxes, and how much are they increasing? How much is your taxable income? How are you screening for tenants? Are you utilizing a property management company, and if so what do they charge? All these things need to be considered.
I didn't say the only factors to consider were monthly payment and rental income. I said a deal where the monthly payment and rental income don't work out is a bad deal, even if the other factors look good. I am assuming the OP is referring to a 30 year mortgage because a 30 year mortgage is an investor's friend in a low-rate environment. Leverage can massively improve rates of return when one is only paying 4-5% for his money. But again, I never said that nothing else needs to be considered. Good cash flows are a necessary but not sufficient aspect of investing.
What economists here have said the current rates of appreciation are sustainable? I might be sympathetic to the argument that there won't be a big crash or that prices will simply level off rather than decline, but the idea that DFW-wide housing can continue to appreciate at a rate of almost 9% seems crazy. The economy isn't growing by 9%. The population is growing closer to 3%. Why should housing go up 9% every year? And that's just the DFW-wide appreciation rate. Many northern suburbs have seen even higher rates.
I don't think you could find a professional economist with any sort of national platform who thinks that is genuinely sustainable.
I didn't say the only factors to consider were monthly payment and rental income. I said a deal where the monthly payment and rental income don't work out is a bad deal, even if the other factors look good. I am assuming the OP is referring to a 30 year mortgage because a 30 year mortgage is an investor's friend in a low-rate environment. Leverage can massively improve rates of return when one is only paying 4-5% for his money. But again, I never said that nothing else needs to be considered. Good cash flows are a necessary but not sufficient aspect of investing.
I believe EDS has said the current rates are sustainable at least in the short term, and that a worst case scenario might be a decrease to 5-6% per year rather than 9% per year rather than an outright decrease. I think he has a doctorate in economics? I may be totally misrepresenting his position however, so he'll have to confirm it himself. But solid economic forces are driving up the costs (supply and demand of housing, the massive influx of new residents and businesses), it's not like an artificial bubble.
Essentially agreed with everything else you said.
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