financing considerations

Question for the experienced investors on this forum…

If I were to start my REI career in rentals, please give your advice on the following:

  • Although I am certain that lenders take your current financial situation into consideration when processing your loan, do they also utilize the potential rental income to make their decision on granting you a loan? As an example, if I owned 10 properties, do I need to show that I have the income (w/o tenants) that I can afford to pay the mortgages on these notes?
  • When renting, what percentage of your rental income do you put into a “slush fund” to cover vacancies, repairs, etc.?

Any advise would be appreciated…


The bank will consider part of the income from the rental property.

Each bank probably has their own formula. The last bank I dealt wth for a loan on a rental counted 75% of the rent as income.

My suggestion is that you make an appointment with the banker and ask him if he has a loan in hs product line that might work for you. He will explain to you what the requirements are to qualify.

That’s his job, to make loans, so he won’t mind spending a couple of minutes with you, explaining what is available.

Thanks Tatertot,

Do you own rentals? If so, do you put a certain percentage of your PCF aside for vacancies, repairs, etc?

Thanks again for the response…

The lenders I have used apply 70-75% of the rental income when qualifying the loan.

So theoretically if I build a portfolio of 10 homes that rent for $600 each, I would need to show that I could afford approx. $1500 / month on my own income (using the 75% figure)?

You must assume a 25 vacancy factor.

So add your principal, interest, tax, and insurance together.

Next multiply your rent by .75 to get the rental income used.

Then subtract the PITI from your rental income. If the number is positive, then it will help your debt ratio, if it is negative it will hurt your debt to income ratio.

Stachey, in real world time, fully 50% of the rents that I receive go into a savings account to pay for repairs, taxes, vacancies. That covers my mortgages, too, but I am not fully mortgaged and carry a lot of equity. Other wise 50% of the rents would NOT pay all the expenses plus the motgage.

The bank will possibly count 75% of the rents as income, but they are also going to require you to have 3 time the mortgage payment in income. Each bank is going to have different requirements, but that is a good sort of rule of thumb to use. You will actually have to talk to the bank to ask how they figure out if you are qualified or not.

You also MUST have a good line of credit kept in reserves just in case you get The Repair From Hell, and your emergency fund can’t pay for it. Insurance might pay if your entire roof blows off, but they might not pay if the tenant pours concrete down every drain in the building. They definately won’t pay if the tenant makes meth in your house, and clean up cost for that is astronimical.