When your goal is to “write off” as much of your rental income as possible and depreciate it, at the end of the year you may have added nothing to you taxable income. This makes it look like a liability more than an investment.
So if I make 40k a year and have a rental but wrote off enough to where it adds nothing to my taxable income, the monthly debt still shows up on my credit report and messes up my debt to income ratio so I can’t get another rental. How can I show the bank that I am making money so I can get another property?
That is not a problem. The banks understand rental properties and how they work. The can look at your tax return and know what’s happening. In addition, banks will normally credit you some percentage of the rent, like 75% of the gross rent.
One of my friends owns well over 100 rentals. His adjusted gross income was about $30,000 last year. That’s the reality of owning rental properties.
The reality is that people like you, with a JOB, pay the taxes in this country. There is nothing worse (tax-wise) than being an employee. Businesses pay very low taxes and rental property businesses pay almost none. That’s how you get rich! I love the tax code!
I could be wrong, but I believe the banks start computing your debt/income ratio as if you did not have any rental property at all. Take your gross monthly earned income (salary) and add other recurring income (such as dividends/interest, pension, disability pay, alimony). That is your income.
Next take all your recurring debt payments as if you did not have any rental property at all. Total your monthly rent or mortgage payment on your primary residence, the minimum amount due on your credit card balances, your car payment, and your HOA/COA fee. That is your debt (liability) service.
Divide the debt service by your income to get your debt-to-income ratio.
This is your starting point. Rental property changes either your debt or income but not both. Here’s how.
If you subtract your monthly PITI from 75% of your monthly rent, and have a positive number, then you have a positive net rental income and the bank will say that you are making money. This positive number will be added to your income when computing your debt ratio. If the number is negative, then that amount will be added to your liabilities when computing your debt ratio.
The bank knows that depreciation is a phantom expense (it never takes money out of your pocket), so they won’t count that against you when computing your debt/income ratio.
Assuming nothing else changes your starting debt/income ratio, the banks will keep lending you money to purchase another rental property if your net rental income is always positive.