Rental property considered Debt or asset by lenders?

Asked by Taza Guru, Sunnyvale, CA Wed Dec 24, 2008

I own a property with LTV around 65-70(not more than 70). I just bought a rental property couple of months ago and seems like the appraised value is more than what I paid. If I want to buy another rental property, would this rental property (nearly cash positive) considered as a debt or loan by a lender? I was told by a credit union that it would be considered as a debt until 2 years of rental income. Whats the norm?

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Mario Banuel…, Agent, San francisco, CA
Sun Jan 4, 2009
Taza, with most financial institutions they will require for you to to have leased the propert for two years. They may request copy of your last two years tax returns with Schedule A to verify rental income. It is 75% of: monthly mortgage payment, including taxes, insurance, HOA if applicable ( - ) monthly rent amount. Based on a 70% LTV you may have a positive cash flow after using this calculation, but it may not depending on the amount financed and rent amounts.

Like Andrew said, I definately would suggest checking several options. Most lenders differ from eachother one complete qualification requirements. Especially if you are looking to invest again before another two years.

Glad to help. Good Luck! - TonyB
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Andrew, , San Jose, CA
Sun Dec 28, 2008
I like Herb's answer at the bottom. I think it is a very practical way for an investor to look at an investment property. If more investors had that kind of intelligence, California wouldn't be in the predicament it is in.

From a lender's standpoint. They would take 75% of the rental income you get and then subtract your the mortgage payment. If this number is positive then you could say the property would be an asset to your new purchase. If the number is negative you could say that it is a liability. This is a very simplistic breakdown but it is pretty accurate. Keep in mind that just because it is considered a liability it doesn't mean that you won't qualify for a new loan.

Credit unions are great because they offer an alternative to banks and other mortgage lenders. Like most lenders, credit union loans are the great for some scenarios but not for others. I have heard the two year rule before but it is a bit strict. Try another bank or mortgage lender and you will probably have more luck.
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Dallas Texas, Agent, Dallas, TN
Thu Dec 25, 2008
Mortgage broker best resource to review your financials. Lender approval for your next purchase debt ratio is considered, credit scores, financial, employment history. If the home is not leased is liability, I would recommend lease home prior locating another property therefore you have cash flow offset debt.
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CJ Brasiel, Agent, San Jose, CA
Thu Dec 25, 2008
Taza -

You will be comparing all investment properties at about 75% of their income generated. Then the remaining balance will be counted toward your debt to income ratios and the lender will determine what risk is toward loaning you money toward a third investment.

It would be a good idea to run the numbers through one or two loan officers and see what they say.
It is a numbers game for sure.

Good luck.
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Glen Mitchell, Agent, Half Moon Bay, CA
Wed Dec 24, 2008
Guidelines are always changing and if you want to send me an email I can find out current for sure. With the equity you say you have in the house you will probably be able to count 75% of the rental income. Was the house rented prior to your purchase?

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, Both Buyer And Seller, 49024
Wed Dec 24, 2008
Taza, I may get some slack on this but here's my 2 cents worth. If you own a property with a Mortgage on it, its a liability. Even if its paid off you still have taxes, insurance, maintenance etc. so still a liability. Now if its paid off and an occupied rental, then its an asset. Herb
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