Rental Income

July 13th, 2011

Did you know that if you are considering buying an investment property that you can add up to 80% of the rent to your gross income?

I’m still surprised by the number of people who contact me about purchasing their first rental and they have done their own debt servicing calculation and don’t see how they can qualify for another mortgage without paying off their primary residence.

It’s like watching a lightbulb go on in their head when I tell them that they qualify not just on their income, but the rental income from the property as well. The whole idea is that you rent out the building for enough cash to cover mortgage and expenses. The really good deals will provide positive cashflow of, hopefully at least $100/mo.

There are people who buy with negative cashflow every month as they are “counting” on the appreciation of the building to rise and they will make their money when they sell. I have to say I disagree with this strategy, unless you have a way of “forcing” appreciation through renovations, increased rent, change of use (highest and best), etc.

If you are counting on the market going up and suddenly it drops significantly, then where are you? You now own a property which is worth less than what you purchased it for and it’s costing you money each month.

The old standby is if it doesn’t cashflow from day 1, you don’t have an asset, you have a new monthly liability. Appreciation is the icing on the cake.

Some of you out there are saying, I thought the rental offset was 50%. If your bank or lender is using CMHC as the insurer, then yes 50% of the renal income is added back. If you are a savvy investor or at the very least your mortgage broker is, they will know to avoid CMHC and request that the property be insured with Genworth. One of the very few things that Genworth does differently (otherwise a clone of CMHC). They seem to understand that at 50% almost NOTHING will cashflow or meet the debt servicing requirements.

For those investors with 3 properties or MORE, things also change again slightly as with a few lenders, your portfolio is now viewed as a separate entity and a DCR (debt coverage ratio) spreadsheet is used, which depending on the lender, gives you anywhere from 75-85% of your rental income. As long as this spreadsheet shows a DCR of 1.2:1 (i.e. for every $1.20 in rent, there is $1 in debt servie) then they focus only the current property.

Finally, for those self-employed people, business owners and the like, who try their best to avoid showing an income. I spoke about this 2 blog posts ago. There is also a product for you to purchase rental properties. I considered this the Holy Grail for awhile as no one offerred this kind of product. The idea is you can “state” what your gross income is (i.e. what you make in your business or before deductions) and you can get 80% (and in one lenders case 100%) rental income. Don’t get me wrong, this isn’t the cheapest product on the planet, but keep in mind you business owners already now how to claim business expenses. All the fees, and interest on the mortgage are tax deductible AND someone else is paying for the mortgage.

That’s the quick summary for this week.


One response to “Rental Income”

  1. john says:

    Great article, I can’t wait to buy an income property (and not a liability).