Input on Using Rental Income from Primary Residence

5 Replies

Relatively new investor here!

I purchased a single family home in October 2014 and have been renting out 3 of the 4 bedrooms ever since. This results in a monthly profit of $427. I am currently on a plan that would allow me to purchase a 2nd property in the next 15-18 months. However, it would be hard for me to qualify for a second mortgage based on my monthly income and I want to take my rental income into account as this is an additional $5124/year and can offset the mortgage from my liabilities. 

I am now in the process of filing my 2014 return and due to the limited number of months that I rented the property (November/December), the number of deductions that I am able to take from the home purchase and a few repairs that I did prior to move in, my rental income is showing as -$3300 for 2014. Will this create issues for me moving forward? What is the best way to handle this? I am willing to limit my deductions to show a more positive rental income number. 

Thanks in advance!!

I don't think this will matter.  From what others have posted, lenders aren't going to count "roommate income".  So, before jumping through hoops on your taxes, speak with your prospective lenders and see what, if anything, they will do with this income.

Originally posted by @Jon Holdman :

I don't think this will matter.  From what others have posted, lenders aren't going to count "roommate income".  So, before jumping through hoops on your taxes, speak with your prospective lenders and see what, if anything, they will do with this income.

 Jon,

If I am unable to count this "roommate income" as income, is there a chance that it be used to offset the mortgage on the first property since it is cash flow positive?

Thanks!

If they won't count roommate income, they won't count it at all.

You probably want to consult with an accountant about your taxes, too.  You mention deductions from the purchase and for repairs made prior to moving in.  Repairs made to a rental prior to having it rent ready are not deductible.  Instead, they add to your basis.  Closing costs associated with the purchase are also somewhat complicated.  And all these get split up because you're using this property partly as a residence and partly as a rental.

"Cash flow positive" for rentals is determined from your tax return. Depreciation is typically added back in. For a new property, banks use the formula "net rental income = 75% * rent - PITI".

@Alex Agafonov

@Jon Holdman

Jon is right repairs or improvements done prior to the rental entering "service," is added to basis however interest and incidentals like property tax can be itemized on your personal schedule A. I am not an accountant or tax professional so this is only my experience with this.

Usually you can use rental income on a rental property but from what I understand you live in this SFR as a primary residence and rent out the remaining 3 bedrooms. These roommates are considered boarders and boarder income cannot be used. The only case when it can be used is when its a full time care taker who is there to help a disabled home owner and the home owner receives an subsidy from the government. That income can be used but its an isolated circumstance.

The only program on conventional that allows the use of boarder income outside of the exception i mentioned above is MCM- My community Fannie Mae but it requires the borrower make under the area median income (depending on county) and has no other properties owned at the time of funding.

I work with many investors who house hack on the lending end and have personal experence in house hacking as Brandon would call it. 

Also to add on that you can use 75% of the gross income when you plan to vacate your SFR home for the 2nd home but there are requirements to use this 75% of rental income. Its not as easy as ABC.

You'll need to document 30% equity in your current primary SFR in order to use the rental income and you'll need 2 months payment reserves on the new property and the current property as well.

There are ways around the 30% equity requirement on conventional financing but that is a more indepth conversation.

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