Net Losses are a good thing.... Right?

7 Replies

So I am preparing to buy my next(second) investment property. After providing my tax documents to my lender they see that I took a net loss last year on my current rental. Which is good for taxes right? Here's the rub... the lender says they wont use the rental income to help qualify for my next purchase because of it. They can only use the profit I made after deductions. Which in this case was "nothing". 

For example if I had a STR that nets 40k per year, but after deductions and depreciation I was left with a taxable income of 10k per year. The lender would only use the 10k as income to help qualify for the next one?

Am I understanding this correctly?

Unfortunately, yes. For conforming loans, that is. 

This is the double edged sword of investing and self-employed. Great write-offs, less taxes, but net income is so low it's hard to get approved for a loan. I would still run it buy a good lender that knows how to work with self employed and investors, there are some deductions you can add back, so you might be ok.

If not, you will have to start looking at non-conforming loans - Bank statement and DSCR. You will take a hit in interest rate for sure, but you should be able to qualify.

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@Jesse Rivera   Yes I think its time to shop for some non-conforming loans. I'm guessing I could qualify but with less favorable terms. If the numbers still make sense than its better than doing nothing.

@Chris Mason @Ned Carey   My rental(in its first year) took a loss of 1900 for the year. The lender said that basically means he subtracts that from our income. I haven't done this enough times to know if what he says is accurate or to debate it with him which I why I thought I'd ask here. I didn't know that going into this. Anyway, I appreciate you chiming in. Every bit of info helps. Thank you

@Mason Jeffries

Losses from rentals are good from a tax perspective. It means the cash-flow you are getting from the rental are not increasing your tax burden.

Your lender should normally add back certain items to figure the income to add back for DTI purposes.
Items such as Depreciation and one time repairs(Roofs, HVAC, etc) are normally added back