How does mid term rental income affect appraisal, if at all

Question

Just bought my first duplex here in Norfolk VA. I'm using a 203k loan and my plan is to live in one of the units for a year and then turn both units into mid term rentals for nurses. My hope is to get rid of PMI when I refinance into a conventional loan (asap). I could not find any info on how mid term rental income can affect an appraised value. Does anyone know how this work? I'm 40k short of that magic number with the closing appriasal and I know with the projected NOI doing this strategy I could get there easily. Do banks look at this NOI or is it just for long term rentals exclusively (total noob here, sorry)

Jacob Sloop · Answer

First off congrats on making a purchase!!

There is a mid term rental group local run by @Mel Volland that would be a great source of info

For a residential loan they are going to use the sales comparison approach for value most likely so income is not a factor.. I have gotten a commercial loan product for a duplex that used income for the appraisal and it was very favorable outcome

Nicole Heasley Beitenman · Answer

Since you're a residential property pursuing a residential loan, income won't affect the value. Be sure you run numbers before you refinance into conventional. The difference in interest rates doesn't always work out to less than the PMI, and Fannie/Freddie are making some big changes to conventional and FHA loans that might knock conventional loans off their pedestal.

James Carlson · Answer

@Alessandro Stammes

Congrats on the deal! That's huge. A few thoughts:

One, rental numbers of any kind (medium-term, STR, whatever) don't affect the appraised value. As others have said, appraisers are exclusively looking comparable sales in the area. They're looking at houses of similar size, bedroom/bathroom mix, etc. They don't care what rents it can draw, unfortunately.

If you want to get there, you either A) add significant value in terms of renovations or B) you give it a year or two and let the market give you that appreciation.

Also, if you're doing medium-term rentals for traveling nurses, I'd read Erin's Guide to Midterm Rentals. It's a quick read and has a bunch of checklists and tips on setting up and marketing an MTR.

I wish you luck!

Reid Chauvin · Answer

@Alessandro Stammes - congrats on your purchase! Appraisals do not consider rental income in determining value for conventional or government loans (or for any type of residential loan that I am aware of). Appraised value is determined based upon recent sales of nearby similar properties. The appraiser will make value adjustments based on differences in features of the property compared to the 'comps', (ex: bigger square footage would be a positive adjustment).

The appraiser WILL do a rent schedule so that the market rent for the prospective property can be factored into your debt-to-income ratio. The Lender must request for this to be done though, and this can't be done for every property or loan type.

One thing for you to keep in mind with your strategy is the timing of your refinance and how your occupancy will affect the loan-type. If you are no longer living in the property (or even if you are still in the property but moving out very soon) then you will likely have to use an investment property conventional loan, which has a maximum loan to value of 75% for a refinance.

How does mid term rental income affect appraisal, if at all

How does mid term rental income affect appraisal, if at all

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