Some home buyers hoping to make money from real estate investing choose to start their real estate investing adventure by turning their first home into a rental property. With a little careful planning, a homeowner can use the potential rental income they would make from this first property to help them qualify for financing on a new home.
What does the term future rental income mean?
Future rental income is a term that describes the amount of money you can expect to receive when you rent out your current home. It is often used in the mortgage world to represent the estimated amount of income that your rental property will bring and as such used in calculations to help a homebuyer qualify for a mortgage on a new home loan.
This is a term that can apply to many different types of properties whether someone is looking to purchase another investment property or looking to buy a multi-unit property where they live in one unit and rent out the others or if you want to rent your old home and purchase a completely different brand new one.
Not every home buyer that hopes to retain their first property for rental purposes can afford multiple mortgages without the added cash flow they receive from tenants. This is why some lenders allow for a future rental income to be calculated to help you qualify for an additional mortgage.
When applying for a mortgage using a future rental income you want to make sure that you do not claim 100% of that future rental income. You want to allow for the costs of retaining the property and operating it as a rental. This can include renovations, tenants failing to pay, vacancies between tenants, and general upkeep. To account for these costs a lender will often calculate future rental income as 75% of the total expected rent amount you will charge for the property.
Additional: Rental Features that Attract Top Tenants
How future rental income is calculated
To arrive at what your future rental income will be calculated it is best to sit down with an expert real estate agent and break down the current rental rates of similar properties within the area. This will help you to gather a reasonable projection of the rent amount you will be able to obtain from a future renter.
For example, if based on the current rental market you would be able to obtain $2000 a month in rent a lender will allow you to submit that you will be receiving $1500 per month in profit from rental income. $1500 will be used to offset the cost of the mortgage you are applying for to finance your next property.
If you are hoping to purchase a home using a mortgage that you qualify for with future rental income it is always best to seek certified preapproval before shopping for your next property. You do not want to rely on being able to obtain a mortgage after placing an offer on a property.
Find a renter and execute a lease
You will want to make sure that as soon as you have made an offer on your next property you are doing the work to advertise your current home as an available rental and get a renter in the property as soon as possible. Once your lender has received proof of a valid lease for your home they will be able to then officially approve the loan for your next property.
For more information on purchasing a home in Snohomish County please contact us anytime.