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    Thread: Buying a rental property

    1. 07-23-2012 09:28 AM #1
      When applying for a mortgage to buy a rental property, does the bank take into the account the income you'll make from the property when deciding how much they'll loan you?

      I've been looking around at 3 and 4 flat buildings, with the idea that I would live in one of the units for a while. Assuming that with a 10-20% down payment, the mortgage/taxes/insurance would be 100% or almost covered by the income from the other units. Would a bank loan me 5 or 10 times my gross annual income from my regular job? Or is that way out there and wouldn't happen? I guess the biggest risk for them, and me, would be if there were a few months without tenants and I had trouble covering the whole thing myself.

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      07-23-2012 03:38 PM #2
      Quote Originally Posted by PolskiHetzen View Post
      When applying for a mortgage to buy a rental property, does the bank take into the account the income you'll make from the property when deciding how much they'll loan you?
      Nope. Since rental income isn't guaranteed, they look at your ability to pay for the property.

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      07-23-2012 04:38 PM #3
      Quote Originally Posted by Diamond Dave View Post
      Nope. Since rental income isn't guaranteed, they look at your ability to pay for the property.
      this must vary on location/bank as ive heard the exact opposite from several lenders and real estate agents.

    4. Senior Member dunhamjr's Avatar
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      07-23-2012 05:09 PM #4
      Quote Originally Posted by ValveCoverGasket View Post
      this must vary on location/bank as ive heard the exact opposite from several lenders and real estate agents.
      it probably can vary by bank BUT...

      since rental income is not guaranteed, then its hard to see that every bank is going to lend based on it.

      also. even if they do lend based on that rental income. they will likely NOT lend on the expectation of that full amount.

      just like with any real estate deal, there is a real likelihood that the lending amount will be tempered by vacancy rates, average rents... etc.

      i bought my rental during more open lending practices... but i also had an appropriate down payment and can carry the mortgage payment when my wifes income is considered.
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      07-23-2012 11:16 PM #5
      Rental income is still income and what income is guaranteed?

      Having said that, I would find it foolish it include rental income to determine the loan amount. That's like saying you are going to rent out your basement. The bank shouldnt care. Forget the lending instituion OP, do you really want to take on that much basing any of it on rental income?

      I can tell you its no get rich quick scheme, even if you get good tenants.
      Last edited by BetterByDesign; 07-23-2012 at 11:18 PM.
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      07-24-2012 12:26 AM #6
      Most banks will include rental income if you have current lease documentation indicating that the units are occupied and leased. If the units are not currently occupied with leases in place, it obviously is more difficult to prove speculative market rent rates for the units.

      Also most lenders only accept a certain percentage of rent as income for your LTV. Most often this percentage is ~75%. So if you live in one unit and the other 3 are currently rented at $1000 a month, the bank will only count $750/unit as income. This would translate to a $2250 increase in monthly income for your LTV. Your LTV will then be based off of the $2250( in the example) plus your monthly gross income from your job, minus your recorded debt obligations including the potential mortgage.

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      07-24-2012 12:55 AM #7
      Quote Originally Posted by BetterByDesign View Post
      Rental income is still income and what income is guaranteed?

      Having said that, I would find it foolish it include rental income to determine the loan amount. That's like saying you are going to rent out your basement. The bank shouldnt care. Forget the lending instituion OP, do you really want to take on that much basing any of it on rental income?

      I can tell you its no get rich quick scheme, even if you get good tenants.
      You know nothing is guaranteed, but I think you understood my meaning.

      On new rental property you cannot show lease/income history... So how would you presume that income that has never been proven could be used to get the loan? If it was that easy I would own a few large commercial buildings since future rents could more than cover any mortgage I take out.

      If you are buying an existing rental property that has tenants with leases... then you can use those docs and that income. But like another poster said, you are not going to be able to use 100% of that income.

      Remember that even in the best situations, you are still going to have yearly repairs/maintenance AND there are going to be instances when units are not rented.
      Last edited by dunhamjr; 07-24-2012 at 01:16 AM.
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      07-24-2012 09:47 AM #8
      Quote Originally Posted by dunhamjr View Post
      Remember that even in the best situations, you are still going to have yearly repairs/maintenance AND there are going to be instances when units are not rented.
      Agreed/tell me about it.

      OP there will be plenty of expenses and circumstances that will offset your rental income so I would be very conservative regardless of whatever the lending institution offers you.
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    9. 07-24-2012 02:01 PM #9
      Quote Originally Posted by BetterByDesign View Post
      Agreed/tell me about it.

      OP there will be plenty of expenses and circumstances that will offset your rental income so I would be very conservative regardless of whatever the lending institution offers you.
      The property that got me thinking about this sold for $390,000. A 6 flat, with rent between $650 and $950. Although that seemed low, maybe for a reason. I believe taxes were $13,000 a year.

      So looking at about $3,000 in payments a month, with about 4,800-5,000 gross rent.

      Is that reasonable, too good to be true, or not nearly enough?

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      07-24-2012 02:25 PM #10
      Quote Originally Posted by PolskiHetzen View Post
      The property that got me thinking about this sold for $390,000. A 6 flat, with rent between $650 and $950. Although that seemed low, maybe for a reason. I believe taxes were $13,000 a year.

      So looking at about $3,000 in payments a month, with about 4,800-5,000 gross rent.

      Is that reasonable, too good to be true, or not nearly enough?
      if those numbers are true, then it is probably fine.
      but the selling price may or may not tell you if the roof is 3yrs old or 3yrs from replacement. etc.

      for the rents, you would probably want to estimate on the low side, so $650x6 = $3900...

      also consider you can only really 'use' 75% as someone else said... so now that is $2925.

      don't forget, that you talked about living in a unit... so now instead of 6 units for rent you are down to 5... so minus that you are really closer to $2450 in rental income.

      even with a tenants on a yearly lease, you will need to consider cleanup and repairs will be needed each time someone moves out. if you hire it, you can get the work done quick... but $$$. if you DIY you might be without rents on a unit for a week or a month.

      not trying to really sway you away from a place like that. but just keep your eyes open.

      if you are buying a building the current owner should be able and willing to provide you with some basic numbers about who is on what lease terms, unit rent rates, and estimated yearly expenses... since you are in essence buying a business from them.

      it is in there interests to provide you with info that makes you want to purchase the property though, so dont take their word as absolute gospel, but more a potential expectation.
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    11. 07-24-2012 03:29 PM #11
      Quote Originally Posted by dunhamjr View Post
      if those numbers are true, then it is probably fine.
      but the selling price may or may not tell you if the roof is 3yrs old or 3yrs from replacement. etc.

      for the rents, you would probably want to estimate on the low side, so $650x6 = $3900...

      also consider you can only really 'use' 75% as someone else said... so now that is $2925.

      don't forget, that you talked about living in a unit... so now instead of 6 units for rent you are down to 5... so minus that you are really closer to $2450 in rental income.

      even with a tenants on a yearly lease, you will need to consider cleanup and repairs will be needed each time someone moves out. if you hire it, you can get the work done quick... but $$$. if you DIY you might be without rents on a unit for a week or a month.

      not trying to really sway you away from a place like that. but just keep your eyes open.

      if you are buying a building the current owner should be able and willing to provide you with some basic numbers about who is on what lease terms, unit rent rates, and estimated yearly expenses... since you are in essence buying a business from them.

      it is in there interests to provide you with info that makes you want to purchase the property though, so dont take their word as absolute gospel, but more a potential expectation.
      thanks for the advice.

      The unit I mentioned above I actually probably wouldn't want to live in. That one would be a pure investment which of course means I'd be further away from it to deal with problems. My friend's dad is a broker, and he looked it up. He said rent is between 650 and 950. Not sure where he got that price from, but I assumed that there are at least 2 different sized units in the building and that some rent at 650 and some at 950. Maybe some in between.

      The roof replacements and bigger improvements like that I'm not too worried about since my dad is in construction and I've been working with him for quite a while. So I think we'd be able to asses the condition of the building pretty well, estimate how much it'll cost and when, and get good price to do it when it needs to be done.

      Outside of not having a tenant, or having a tenant who isn't paying, what worries me most are the little BS problems. Like he locked himself out or toilet is clogged or whatever else. Since I have a full time job, I can't just drop things and go over there. Which is why I was considering a management company. I believe those are 10%ish of gross rents? Any thoughts on those, beyond the obvious costs?

      This is still far away. I'm just starting my research early.

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      07-24-2012 03:59 PM #12
      Also know that any property over 4 units is considered commercial property and is under an entirely different set of lending standards. These standards as you can imagine are much more stringent and comprehensive.
      Any property with 4 or less units is considered residential property and thus lending standards are a little more relaxed.

      As for a Property Management company, it depends on what type of person you are. I managed my own properties for years, but I quickly tired of it. I'm not the correct type of person/personality for property management. I have since secured a very good property management group to handle my properties and I am very happy with the result. In my mind it is money well spent and they actually earn the 10% of rents they take montly

    13. 07-24-2012 04:10 PM #13
      Quote Originally Posted by bubbagti View Post
      Also know that any property over 4 units is considered commercial property and is under an entirely different set of lending standards. These standards as you can imagine are much more stringent and comprehensive.
      Any property with 4 or less units is considered residential property and thus lending standards are a little more relaxed.

      As for a Property Management company, it depends on what type of person you are. I managed my own properties for years, but I quickly tired of it. I'm not the correct type of person/personality for property management. I have since secured a very good property management group to handle my properties and I am very happy with the result. In my mind it is money well spent and they actually earn the 10% of rents they take montly
      I had no idea it was a commercial property. Good to know.

    14. 07-25-2012 01:16 PM #14
      Quote Originally Posted by PolskiHetzen View Post

      Outside of not having a tenant, or having a tenant who isn't paying, what worries me most are the little BS problems. Like he locked himself out or toilet is clogged or whatever else. Since I have a full time job, I can't just drop things and go over there. Which is why I was considering a management company.
      I will say that you should never underestimate the stupidity of people. We rented two different places, in college and right after, a total of 3 years. We called the landlord with exactly one emergency, all the fire alarms went off, in unison, at 4am.

      Both places' landlords said we were by far the best, quietest, reliable tenants ever. My point is, apparently the norm is that people bug you ALL THE TIME for a clogged toilet, locked themselves out, late rent, etc. Based on our landlords' exasperated rants, the average person seems incapable of picking up a plunger, resetting the circuit breaker, keeping an extra key somewhere, or pulling their own hair out of the clogged shower drain. They call the landlord. For. Everything.

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      07-25-2012 01:27 PM #15
      Quote Originally Posted by 484 View Post
      I will say that you should never underestimate the stupidity of people. We rented two different places, in college and right after, a total of 3 years. We called the landlord with exactly one emergency, all the fire alarms went off, in unison, at 4am.

      Both places' landlords said we were by far the best, quietest, reliable tenants ever. My point is, apparently the norm is that people bug you ALL THE TIME for a clogged toilet, locked themselves out, late rent, etc. Based on our landlords' exasperated rants, the average person seems incapable of picking up a plunger, resetting the circuit breaker, keeping an extra key somewhere, or pulling their own hair out of the clogged shower drain. They call the landlord. For. Everything.
      my landlord experience comes from a single family home... so its a little different then this.

      i really dont here about all the little things. broken dishwasher, frig, garage door opener, septic system needs pumping... these are the things i hear about.
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      07-25-2012 03:52 PM #16
      Quote Originally Posted by PolskiHetzen View Post
      Since I have a full time job, I can't just drop things and go over there. Which is why I was considering a management company. I believe those are 10%ish of gross rents? Any thoughts on those, beyond the obvious costs?
      You'll be lucky if it's only 10%.



      All states have different rules, but in general, they tend to favor tenants and force landlords (owners) to foot all costs if anything goes to court. (in Oregon) Even if you go to court (let's say, not paying rent for 3 mos) you can win a judgment and STILL need to pay the Sheriff to evict or remove them. Oh, you wanted your 3 mos rent money? take time off work and go to court for that as well. Unless the tenant/squatter reschedules. Then pay for another court date. Court date comes and you win? Great! here's a piece of paper that says they need to pay you. Now go get your money from them yourself.


      Here's a picture of how some deadbeats left a family rental. We had just gotten a deadbeat to vacate at the end of December (hadn't paid rent since October) and when we arrived to clean up the place in early January, there were two other deadbeats. By law we couldn't force them to leave, so I had to play the court game with them. Luckily the town was 2hrs away and court dates basically required a full day off work to attend Finally got them out in early March only to find every single room in a 1500sqft rental had at least one hole in the wall. And they broke in to a locked storage room and stole some tools and supplies.

      Just providing a different perspective on the whole "investment property" thing. People think it's so easy to do; until sh!t goes wrong. Then it's costly and really not fun.

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      07-26-2012 11:35 AM #17
      Quote Originally Posted by 484 View Post
      Based on our landlords' exasperated rants, the average person seems incapable of picking up a plunger, resetting the circuit breaker, keeping an extra key somewhere, or pulling their own hair out of the clogged shower drain. They call the landlord. For. Everything.
      My tenant called me because her garbage disposal stopped working.
      I had just had someone out there to replace a broken basement window. She accused him of stealing the circuit breaker for the disposal out of the electrical panel. I stopped by and hit the reset button on the bottom of the disposal. Problem solved.
      Of course it's company policy never to, imply ownership in the event of a dildo... always use the indefinite article a dildo, never your dildo.

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