I have rental properties that I have owned now for several years. I will show a net profit before depreciation for the second consecutive year as this year comes to a close. I am now self employed, and am trying to get myself in the best position possible to qualify for financing investment real estate. My question pertains to the calculation of DTI based on the tax returns and current lease agreements. I know that usually they take 75% of the rental income (per the lease agreements) and net that against your PITI on all your properties to get the net income. Does this calculation get thrown out the window if you can show more income on your tax returns (before depreciation)? If so, is the net rental income before depreciation the number you then use as your income to calculate your personal DTI?
The leases are only used for income purposes if the properties are not on your previous years tax returns. The best way to calculate the income if you have the returns is add up the total costs and subtract the rental income. If the number is positive it is income. If it is negative it is looked at as revolving debt. Hope this helps.
When you say costs, are you including the cost of capitalized improvements?
When I say costs I mean whatever is on schedule E lines 5 through 18. Are you showing the cost of the capitalized improvements on Schedule E?
The original costs of Capitalized improvements are not shown on Schedule E as they are capitalized and then depreciated (shown as depreciation expense on Schedule E). So, for purposes of calculating DTI, lenders take your rents received per line 3 of your schedule E and net it against your expenses shown as a subtotal before depreciation on line 19? What if you have increased rents received in the current year on the same properties listed in the previous years tax return? Do they take the new rents at 100% and use the same expense numbers from prior year to calculate the estimated net rental income?
No they will not use the increased rents. They will take the income from the tax return and be done with it. There is not much wiggle room when it comes to calculating income such as rental, bonus, commission, etc…