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Does rental income count towards our own income?


Photo by Ted Dawson

Your teachers always said that if you have a question, you should ask because. You’re probably not the only one with the same question. Well, I have a feeling that holds true even when we’re out of school. Here’s a real question asked by a real buyer:



If we’re buying a multi-family rental that we plan on living in, can we count the rental income toward our own income?




Most lenders will count at least some of the rental income from a rental property toward a buyer’s income. One lender I spoke with in person recently told me that they can count 75% of the rent toward a buyer’s income. Even if you don’t have landlord experience. Even if your income comes from 1099 income.


It’s best if there is a lease in place, so you can show the lender exactly what the tenant is supposed to be paying. But if there isn’t (yeah, I asked!), then a lender will have a market rent analysis completed as part of the appraisal.


If you can show that the other half of a duplex is renting for $900, with a lease or rental analysis, then you can count $675 per month as income for you, for qualifying (that’s $8100 annually). But with no lease, an appraiser would have to confirm what market rent would be for a similar unit. Presumably that would be around $900.


Why not 100%? Because we don’t live in a fantasy land, is basically why. That 25% cushion accounts for unexpected maintenance, capital expenditures, and vacancy (incidentally, when I run numbers for investors looking to buy multi-family in Montpelier and Barre, I use a 25%-30% cushion when calculating cash flow, the difference is whether I feel confident that the condition and layout will lower my vacancy to 0%-5%, or whether it’s more realistic to use 5%-10% for vacancy).


Even a few hundred dollars each month can make a difference in the ability for someone to buy a rental property in Montpelier or Barre. An owner-occupant can get an FHA loan on a 1-4 unit, and get in with as little as 3.5% as a downpayment. But, as of this writing, the FHA only allows the ratio of housing payments to gross income to be up to 31%. 


Which means that the extra $675 monthly that counts toward your income could increase your purchase power by $26,000. If you were approved for $150,000 for a single family home, you’d likely be approved for $176,000 for a duplex where you live in one unit and rent the other for $900 each month.


Different banks handle things differently, so make sure to ask your lender what their policy is on handling rental income. Also, loan decisions can be property specific. A straight side by side duplex might be treated differently than a large Victorian with a small accessory unit on the third floor. You’ve just got to ask about them.  And if you don’t get the answers you want, call a different lender. Or call us at 802-225-6425 and let us connect you to a lender who can help you.

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