Schedule E and mortgage financing

[Justin Salera]

Hi, I am a newer house hacker and will be looking to purchase another property in 2023. As many may know, house hacking you rely heavily on the rental income to be able to qualify for more debt. This year I spent allot of money on my property, renovated one apartment and spent some money on other things. When doing my taxes this year, if I recognize a loss on my schedule E, will that have any negative effect on the eligibility to obtain financing in the future. Thank you. 

[David M.]

@Justin Salera

Pretty much...  For your debt-to-income ratio, the lender will use 75% of your rent (not your profit).  Additionally, the deductions you make will be averaged into your ultimate profit/loss.

[Jay Hurst]

Quote from @Justin Salera:

Hi, I am a newer house hacker and will be looking to purchase another property in 2023. As many may know, house hacking you rely heavily on the rental income to be able to qualify for more debt. This year I spent allot of money on my property, renovated one apartment and spent some money on other things. When doing my taxes this year, if I recognize a loss on my schedule E, will that have any negative effect on the eligibility to obtain financing in the future. Thank you. 

Here is the worksheet underwriters will use to establish rental income/loss.  These numbers come right off your schedule E. The add back of non-cash items like deprecation and cash deductions like mtg interest, property taxes help the numbers more then a lot of investors understand.  conventional rental income worksheet

[Trevor Alexander]

Hi Justin -

Yes, a loss on your schedule E could potentially affect your financing on the next home if you don't have enough outside income to cover the DTI requirements. If you are purchasing a NOO, you can use 75% of the projected rents on that property to help offset your debt load.

Lenders will look at your net P/L on your schedule C to determine the income generated from the property. However, there are multiple addbacks to be included. Mortgage interest, homeowner's insurance, HOA fees, and property taxes are three of them. These will already be included in your DTI, so will not double count against you. The potential big one that can be added back in and not count as loss is Depreciation. Lastly, Renovation, and non recurring repairs can also be added back in. Be prepared to show documentation to prove to the Underwriter they are indeed non-recurring expenses that took place.

Simple scenario: let's say your schedule E shows a net loss of $20,000 for the year. But there's $15,000 in depreciation, and another $15,000 in non-recurring expenses - makes your net profit +$10,000 rather than -$20,000.

Hope that helps!