Rental Exepsnes and Debt to Income

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Rental Exepsnes and Debt to Income

Todd Ashley
Rental Property Investor · Portland, OR · Member since 2015 · 96 posts · 23 votes

Hi all, looking for a quick overview of which type of rental expenses counts against your debt to income ratio and which do not? For instance, I am assuming that any utilities I pay are a straight expense, but what about materials for a kitchen remodel? I assume those would be depreciated and would not count as an expense against income for loan qualification purposes?

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Ned CareyPro Member
Moderator
Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
4y

@Todd Ashley it depends, are you talking about a loan other than a loan to purchase or refinance an investment property? Or are you talking about some type of personal loan and you want to know how your investments will count against the personal loan?

Even given the above it will also depend on the lender.

But regarding improvements that increase the value of a property they are "capital expenses" they should not show up in any evaluation of profit and loss (income and expenses). They are Balance sheet items. In other words they show up as part of what you own vs what you owe. A outflow of dollars for any for "capital expenses" increases your net worth. 

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  • Nicole Heasley Beitenman
    Investor · Youngstown, OH · Member since 2017 · 2k+ posts · 2k+ votes
    4y

    Only your mortgage and the rental income will be factored into your DTI.

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  • Ned CareyPro Member
    Moderator
    Investor · Baltimore, MD · Member since 2008 · 17k+ posts · 13k+ votes
    4y

    @Todd Ashley it depends, are you talking about a loan other than a loan to purchase or refinance an investment property? Or are you talking about some type of personal loan and you want to know how your investments will count against the personal loan?

    Even given the above it will also depend on the lender.

    But regarding improvements that increase the value of a property they are "capital expenses" they should not show up in any evaluation of profit and loss (income and expenses). They are Balance sheet items. In other words they show up as part of what you own vs what you owe. A outflow of dollars for any for "capital expenses" increases your net worth. 

    2Reply
  • Todd Ashley
    OP
    Rental Property Investor · Portland, OR · Member since 2015 · 96 posts · 23 votes
    4y

    @Ned Carey

    Thank you, that is very helpful. In this case I am thinking about future loans for properties or potential refinance(s) (not personal loans). 

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  • Marc RiceBusiness Member
    Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    Most lenders will only count 75% of your rental income towards your DTI for a rental property. Your remodeling expenses should get added to your basis as an "improvement" and be depreciated.

    If a lender looks at your tax returns to determine past rental performance, then it all depends upon how your CPA recorded your maintenance expenses and utility expenses. If they wrote them all off this year then your NOI would go down vs depreciating them over the IRS defined useful life for that item.

    If you want to increase loan-ability, it is better to depreciate those items over a long period instead of writing them all of in the same year in order to increase tax return NOI.

    This is NOT legal or tax advice, I am not a CPA. Please consult with a CPA or attorney.

    [email protected]614-363-2787
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  • Todd Ashley
    OP
    Rental Property Investor · Portland, OR · Member since 2015 · 96 posts · 23 votes
    4y

    @Marc Rice     Bingo! This is exactly the type of info I am looking for. Can you depreciate utility expenses? I am assuming you don't mean actual utility bills. Thanks! 

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  • Marc RiceBusiness Member
    Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
    4y

    @Todd Ashley

    No, that’s an operating expense fully expensed in the year it’s incurred.

    [email protected]614-363-2787
    Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews
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  • Sam YinPro Member
    Los Angeles, CA · Member since 2021 · 583 posts · 738 votes
    4y

    @Marc Rice

    Some banks will only allow 70% of the rents. You just need to ask the bank you are working with.

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  • Chris MasonPro Member
    Moderator
    Lender · CA · Member since 2015 · 9k+ posts · 10k+ votes
    4y

    There are a half dozen or so ways to calculate rental income. It's scenario dependent.

    For a rental property that you have owned for one full tax year, your Schedule E is nothing more than a profit and loss statement, and is taken as such, with a few modifications where we have better information than what's on the P&L:

    Note that we do not even look at the bottom line number, lines 21 and 22 are not directly used in any calculation. 

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  • Basit SiddiqiBusiness Member
    Accountant · New York, NY · Member since 2015 · 8k+ posts · 3k+ votes
    4y

    Kitchen remodel sounds like a one-time item. May be added back for DTI purposes.

    Speak with your accountant regarding if it can be written off or capitalized.

    [email protected]917-280-8544
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