Question about rental income qualification in getting a second mortgage (insurance, escrow)

[ChiCityChiCity]

Hi All,

I purchase my first live in investment multi family property about one and half years ago. It's been doing very well. I always cover mortgage and earn some extra cash from the rental income every month. I'm planning to buy another property like that to rent out.

Currently my monthly mortgage payment is $1500/month, I have no other debts (always pay off credit card bill every month). My monthly income is $5400 pre tax. I have enough cash for 20-30% down. From my understanding, in order to qualify rental income as another source of income for a second mortgage, I'd need to file two tax returns. I filed one time last year. I have a question about filing rental income for this year.

Let's just say for example in 2013, my rental income is $30k. My mortgage payment was $18k. My claimed expenses on the tax return for the rental property is $25k. So does the lender calculate my rental income as $30k - $18k = $12k (so at 50% it is $6k additional income per year apart from job income?) or $30 - $18k - $25k = -$13k (a negative loss?)

I'd rather claim less expenses to qualify my rental income as another source of income for my second mortgage. I just want to make sure I do my taxes right this year so that I can qualify for a second mortgage. Thanks

[thelopez2]

They''ll calculate your full mortgage instead of just the interest payment as an expense and add the depreciation back and add or subtract it from your income. Is the future investment property occupied and rented out and will be profitable?

[ChiCityChiCity]

Thanks for the reply. Let's go back to my hypothetical example to make things clearer.

say job income: $5400/month
rental income in 2013 tax return: $30k
rental expenses in 2013 tax return: $25k
depreciation in 2013 tax return: $5k
my current mortgage is $1500/month

so does it mean the lender will calculate my whole year full mortgage payment (including property taxes and insurance in the escrow) $1500x12 =$18k + depreciation $5k = $23k as total expenses/debt
subtract from total income $5400x12 = $64800 + rental income $30k = $94800 total income - total expense/debt $23k = $71800 income?

I will stay at the current property and completely rent out the future investment property. I do expect it to be profitable.

Thanks,

[thelopez2]

Nope you can think of depreciation as a non expense , so you exclude it as an expense by adding it back to the expense. Does the 25K include 5K in depreciation? If your mortgage is a fixed 30, the expense is: principal, interest, tax, insurance. Basically all you are doing is adding your principal payment as an expense and excluding depreciation since it is a paper loss.

[thelopez2]

Originally Posted by ChiCityChiCity

Thanks for the reply. Let's go back to my hypothetical example to make things clearer.

say job income: $5400/month
rental income in 2013 tax return: $30k
rental expenses in 2013 tax return: $25k
depreciation in 2013 tax return: $5k
my current mortgage is $1500/month

so does it mean the lender will calculate my whole year full mortgage payment (including property taxes and insurance in the escrow) $1500x12 =$18k + depreciation $5k = $23k as total expenses/debt
subtract from total income $5400x12 = $64800 + rental income $30k = $94800 total income - total expense/debt $23k = $71800 income?

I will stay at the current property and completely rent out the future investment property. I do expect it to be profitable.

Thanks,

Income 30k

Expense $25,000 - $5000 [if the 5k was included as an expense] - interest - tax - insurance + (12X$1500).

Or $18,000+25,000 - $5000 - interest - tax - insurance

[ChiCityChiCity]

I'm still confused.

The expense I was talking about is the expense claims in my tax return including advertising, travel, cleaning and maint, insurance, mgmt fee, mortgage interest, repairs,real estate taxes, utilities .... a deduction in my tax return. All comes out to be $25k.

my depreciation is $5k

it is a mortgage 30 yrs fixed. $1500/month payment includes principle, interest, tax and insurance.

Rental income last year was $30k.

So how much rental income can I qualify for the second mortgage?

Thanks,

[ChiCityChiCity]

Originally Posted by thelopez2

Income 30k

Expense $25,000 - $5000 [if the 5k was included as an expense] - interest - tax - insurance + (12X$1500).

Or $18,000+25,000 - $5000 - interest - tax - insurance

Oh got it, so about $7k rental income for a year plus my job income and presumably no debt because my rental income covers all my mortgage payments?

[thelopez2]

Since the $5,000 isn't included in your $25,000 expense
($30,000 - ($25,000 - interest - tax - insurance + $18,000))/12 + $5400

Probably around 7k but you need to look at your returns.

Now that you have LL history, you'll be able to buy with the lease agreements on the new place to help your income.

I think I need to buy in your town, want to manage a place for me

[ChiCityChiCity]

Thank you so much for making it clear. Last question, so if the lender accept my rental income, does it mean I have no debt on the record because my rental income covers all the month debt/mortgage payment?

[thelopez2]

Originally Posted by ChiCityChiCity

Thank you so much for making it clear. Last question, so if the lender accept my rental income, does it mean I have no debt on the record because my rental income covers all the month debt/mortgage payment?

Judging by your numbers it actually looks like income, you still have a debt as far as reserve requirement go.

The thing you might want to plan for, is taking advantage of the $250,000 CG. exception.