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As a homeowner, you know that owning property is a stellar way to build wealth over time. But if you’re interested in expanding your homeownership with a rental property, we’ve got some helpful tips that could help maximize your investment.

A rental property isn’t the same as buying a home you plan to live in. When you apply for a mortgage on a rental property, your qualifying income is determined differently.

If you’re planning to buy a rental property, you might be able to use a portion of the rental income to help you qualify for your mortgage. 

Future rental income—the money you expect to receive from tenants renting your property—can be used as your qualifying income. In some cases, this rental income can be added to your employment income, increasing your buying power and helping you get the mortgage you need for your rental property.

Not everyone can benefit from this perk: it’s only available for buyers who own a home or have previously rented a property.

For more information about future rental income and how you can use it to maximize your rental investment, check out our resources below, then schedule a call with one of our loan experts


How do lenders calculate future rental income for an investment property? 

Your future rental income is determined by carefully considering two factors: the current rental rate and the appraised rental value of the property.

If you’re buying a rental property, chances are it’s already rented when you apply for your mortgage. So when you apply, make sure you provide the lender with a copy of the lease(s) already in place. 

Your lender will use this information to help determine how much rent your property will bring in each month. While this won’t necessarily be the rental income they’ll use, it’s a helpful, real-world number for your lender to consider. 

Once you’ve applied for your mortgage, the lender will also order an appraisal of the property. For this second part of your lender’s consideration, a third-party appraiser will research the current rents of similar properties in your area and determine the fair market rent value.

This market rent value represents the appraiser’s researched estimation of how much rent the property will bring in each month. This number may be higher or lower than the current lease. Still, it ultimately helps your lender understand how your property compares to others in the area.

With these two numbers for consideration, the lender will review the current lease(s) and the market-rent appraisal and use these numbers to determine your future rental income. 

The lender will typically use the lesser rental rate in their calculations to process your application. This helps minimize the risk of the loan that your lender takes on. But these numbers are only used for mortgage approval; you do not have to rent the property at the rate your lender uses for your loan.

Once approved, determine how much you’d like to rent the property each month.

How does future rental income help me qualify for a rental property?

While some borrowers can use future rental income to qualify for a mortgage, it’s not as simple as including the total amount collected each month as income.

There are costs associated with the property that your lender will need to account for to approve the loan. The lender will adjust the rental income amount to allow for the expenses and losses that happen with any rental property.

For investment properties, future rental income is calculated by adjusting the monthly rent collected for vacancies, loss, maintenance, and management expenses. 

  • Monthly rental income X 75% = Adjusted rental income. 

Then, the lender subtracts the monthly housing payment for the property from the adjusted rental income to get the qualifying rental income. Your housing payment includes the monthly loan payment (including principal and interest), property taxes, homeowner’s insurance, and association dues.

  • Adjusted rental income - Housing expense = Qualifying rental income.

Joan wants to buy her second rental property: a 3-unit building she plans to rent. Based on similar units in her area, she plans to rent each unit for $1,800 per month, or $5,400 total. Based on her mortgage estimate, her monthly housing payment would be $3,200. 

To find her adjusted rental income amount, Joan’s lender modifies the total rental income to account for costs and potential losses: 

  • $5,400 x 75% = $4,050

Then, to calculate her monthly qualifying rental income, the lender subtracts the monthly housing payment from the adjusted rental income:

  • $4,050 - $3,200 = $850

In Joan’s case, the net rental income is greater than the monthly housing payment. And because Joan has been a landlord for more than a year, the lender will add this $850 to her monthly income, helping her qualify for the loan.

Who can use future rental income from an investment property? 

If you already own a home, you can make sure of the future rental income from your investment property to qualify for your mortgage. 

Lenders want their borrowers to repay. Suppose  you’re a homeowner with a demonstrated record of on-time payments and a landlord with experience managing a property. In that case, re likely to continue succeeding as a homeowner and landlord than someone without this experience. Lenders privilege these borrowers because they have a proven repayment record. 

If you’re a current homeowner, lenders will offset the investment property’s future housing payment with a portion of the future rental income:

  • Monthly rental income X 75% = Net rental income.

  • Net rental income - Monthly housing payment = Monthly qualifying rental loss.

The investment property has a positive cash flow if the adjusted rental income exceeds the housing payment. Therefore, the lender will include the income amount as an addition to the income on your application.

If the adjusted rental income exceeds the housing payment, the investment property has a negative cash flow. The lender will then include the amount of the loss as a monthly expense. 

Even if the future rental income on your property doesn’t result in a positive cash flow, including this income cancels out some of the housing payments and reduces the loss. This still makes it easier overall to qualify for a new loan.

Revisiting our earlier example, if Joan’s second rental property were a 2-unit building with the same monthly housing cost ($3,200 per month), she wouldn’t make a profit when factoring in the future rental income.

Joan can still use the future rental income because she’s been a landlord. At $1,800 per unit, her property would bring in $3,600 per month. Adjusting for costs and potential losses, her net rental income would be $2,700 per month.

  • $3,600 x 75% = $2,700

Then, the lender subtracts the monthly housing payment from her net rental income:

  • $2,700 - $3,200 = -$500

Because the monthly housing payment is more than the adjusted rental income, Joan’s property has a negative cash flow. 

Even with the negative cash flow, Joan can still use the future rental income to help her qualify for the mortgage. As long as her employment income makes up for the loss, she can buy and fix the property, enabling her to collect more rent over time.

If you have experience as a landlord, please provide your lender with a copy of your most recent federal income tax return. This will prove that you have the experience necessary to benefit from future rental income on your mortgage application.

If you’ve been a landlord for at least a year and the rental income exceeds your total housing payment, lenders will add excess rental income to your qualifying income, boosting your buying power even more.

Who cannot use future rental income from an investment property?

Unfortunately, first-time buyers are out of luck regarding rental properties. Since you don’t have a track record as a homeowner or landlord, lenders will require you to qualify for the entire housing payment based on your employment income alone.

Without future rental income added to your application, it’s much more challenging to get a mortgage for your investment property:

If Joan were interested in buying an investment property as her first home purchase, she wouldn’t be able to use the future rental income to qualify for the loan. 

Joan’s employment income is the only income her lender will consider when approving her loan. She would have to make enough money to cover the $3,200 monthly housing payment on top of her usual monthly expenses and debts. 

There is, however, a workaround if you’re interested in purchasing a multi-unit property as your first home. Buying a 2- to 4 unit home will allow you to factor in future rental income as a first-time homebuyer. 

Because you’ll live in the home, it isn’t considered an investment property like it would be if you rented out all the units. 

In the case of rental properties, every borrower’s situation is different. Your lender will calculate your qualifying income based on your unique circumstance, so it’s best to work closely with your lender.

The pros and cons of an investment property

As you can see, there are pros and cons of buying an investment property, and many of them depend on your personal circumstances.

Potential pros of owning an investment property

  • Potential tax benefits
  • Opportunity for passive income
  • Probability of long-term appreciation
  • Could be a steady, dependable place to put a surplus of cash

Potential cons of owning an investment property

  • Can be a challenge to finance
  • Income might ebb and flow with rental trends
  • Additional management and upkeep responsibilities
  • Potential lack of liquidity and unforeseen costs

Investing in real estate could be a good option for you if you have the resources to do so. It can also be a bit of a challenge before you see the fruits of your labor.


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