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I am going through financing buying rental property. They look at my existing rental income as part of determining my DTI. One of rentals has a monthly rent of $3,200/mo but from my tax filing it shows a monthly negative cash flow of -$120/mo, so they don't count it as part of rental income. I said that's because it included the "paper loss" of depreciation. But they said they have to go with what the tax filing says. Fortunately, my other rentals are new this year so they based on income by the lease agreement. This is a financing through the builder.
Is this a common practice? If so how would my future rental income be counted as income, since on paper they will all have losses due to depreciation?
It sounds like you are over-leaveraged or you're really not making money fom your rentals. How is it that your depreciation expense results in paper losses?
Yes. And all my rental properties including my primary home are paid-off. Which brings me back to my point. Are you over-levaraged?
Reminds me of the experienced investors during the GHC from which I benefitted from. The underwriting standards are more stringent for this reason. Your returns should be greater than depreciation unless you are stretching yourself thin.
Quote:
Originally Posted by HB2HSV
It is done all the time. Are you an experienced real estate investor?
I am going through financing buying rental property. They look at my existing rental income as part of determining my DTI. One of rentals has a monthly rent of $3,200/mo but from my tax filing it shows a monthly negative cash flow of -$120/mo, so they don't count it as part of rental income. I said that's because it included the "paper loss" of depreciation. But they said they have to go with what the tax filing says. Fortunately, my other rentals are new this year so they based on income by the lease agreement. This is a financing through the builder.
Is this a common practice? If so how would my future rental income be counted as income, since on paper they will all have losses due to depreciation?
Standard that we have to go off the tax returns, BUT we get to add back any depreciation.
Standard that we have to go off the tax returns, BUT we get to add back any depreciation.
So you're saying by adding back depreciation, then my property will show a positive cash flow. It sounds like the loan guy did not add back the depreciation then.
Yes. And all my rental properties including my primary home are paid-off. Which brings me back to my point. Are you over-levaraged?
I don't think I am by conventional standard.
Your home is paid off which means all that equity sits there and do nothing for you. It's no wonder you're showing a positive cash flow yest you're way under-leveraged.
Think of it this way, my housing needs have been fulfilled. I don't have to work to pay the mortgage. It's called financial freedom, the cost of a peace of mind. I'm not a slave to any bank.
Quote:
Originally Posted by HB2HSV
I don't think I am by conventional standard.
Your home is paid off which means all that equity sits there and do nothing for you. It's no wonder you're showing a positive cash flow yest you're way under-leveraged.
So you're saying by adding back depreciation, then my property will show a positive cash flow. It sounds like the loan guy did not add back the depreciation then.
Correct. If your bottom line on that rental was (1,000) for the year after all expenses, but you claimed $13k in depreciation, you would be +1,000/mo. for the rental income calculation.
Update: Although the loan officer did not add back the depreciation as discussed above, somehow we're "qualified" for the loan. The paperwork is being sent to the underwriter. Keeping my fingers crossed.
Convoluted as it may, this loan is cheaper than non-QM loans, as it's financed directly through the builder. I save 1 to 2 points on the loan and 1.375% LESS on the mortgage rate.
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