Real Estate News

Investment Properties and Vacancy Factors

Written By: David Reed
Monday, September 09, 2019

That means first time real estate investors must be able to qualify with current debt and the new mortgage, including principal and interest, taxes and insurance. Thatrsquo;s a pretty high bar for many. But, once the initial rental property purchase has closed, any subsequent investment property purchase can use rental income from that unit to qualify.

There are a couple of basic reasons for this, one being a lender wants to make sure someone can handle the new monthly payments along with managing the property. This is evaluated over a two year period. If that two year period sounds familiar itrsquo;s because lenders need all qualifying income to have a two-year history of being received.

In addition, lenders need to make a determination the income will continue into the future. The standard guideline is for two to three years but in reality, itrsquo;s really impossible for a lender to make sure the income will continue but instead make a reasonable determination that it will. If income has been consistently received for the past two years it can be reasonably determined it will continue.

Yet the rental income that appears on a loan application isnrsquo;t the amount used by lenders. Lenders also consider a vacancy factor. A vacancy factor takes into consideration the rental unit wonrsquo;t be rented out 100 percent of the time. And typically, thatrsquo;s what occurs. Tenants can give a 30 day notice, usually anyway, to leave the property at the end of the lease term. The tenants ultimately vacate the property, but the owners need to then clean the unit, make any repairs and prepare the property for a showing. Once the unit is ready for new tenants, it will take some time to find new tenants.

Vacancies can reduce qualifying income by 25 percent. If a unit brings in 2,500 per month, qualifying income will be lowered by 25 percent, to 1,875 to account for the times the unit is not occupied and bringing in money each and every month.

Okay, but what about the real estate investor who currently owns rental units? Income from current rental properties is typically taken directly off of income tax returns, specifically on Schedule E. Lenders have the ability to use that amount for qualifying or they can also apply a degree of vacancy.

When an investor buys a subsequent rental property, the income can be used to offset part or all of the mortgage payment. Investors buy properties that cash flow. If the unit doesnrsquo;t cash flow, itrsquo;s likely it wonrsquo;t be in an investorrsquo;s portfolio. Thatrsquo;s why itrsquo;s not uncommon for a real estate investor to own multiple rental units because theyrsquo;re not an expense, but income.

Calculating qualifying rental income can be a bit tricky for first time real estate investors, but once that initial purchase has closed, it becomes so much easier.

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