Posted by Bill W on November 18, 2000 at 16:17:11:
I’m not sure what you’re getting at from your post. Is the reason you would like the bank to figure the calculation the other way so that you can qualify more easily for a loan or are you talking about the cash flow you will have after all expenses have been paid? The banks, and most lenders, use a way to calculate your Net Operating Income (NOI) based on a formula that has proven itself over time. They take gross rents minus a vacancy and collections cost factor common in your area for a “projected” gross rents for the project. THEN, they subtract operating expenses for the project. These can be management, lawn service fees, snow removal fees (if any), taxes, insurance, an allowance for repairs and so on. After they subtract that money you will have a Net Operating Income (NOI). From this they expect you to pay the mortgages.
The amount you have left after mortgage payments is usually what you are referring to as being added to your income. This figure may seem low to you, but remember that the lender is being careful on their side of the deal, since, if you have even one vacancy you will immediately be in the red until you get another tenant. Your actual cash flow may be quite a bit more if you collect 100 percent of the rent money. More like $270 to $350 per month. Lenders calculate on the side of caution because it is not likely you will always have 100 percent occupancy by paying tenants.
Bill W.
formula to figure income from duplex - Posted by Sharon Ratliff
Posted by Sharon Ratliff on November 18, 2000 at 12:58:22:
If a duplex I want to buy has $1,000 in rents, my bank then counts only 75% of that, then subtracts the monthly pmt $500, taxes $200 and insurance $20. Then you can add that net amount to the rest of your income to come up with a total monthly income. My question is that doing it that way, you end up with about $30 net income per month. So are they doing it the right way? Wouldn’t it be more correct to do it in the following order take the 1,000, subtract out the payment taxes and ins, then take 75% of that figure which leaves me with $85 net profit? Doing it their way it’s almost impossible to show that the property is paying for itself and to get any additional income to add to my normal income. Thanks, Sharon
Re: formula to figure income from duplex - Posted by Paul Macdonald
Posted by Paul Macdonald on November 20, 2000 at 20:43:42:
Why would you take the rent, subtact the tax & insurance and then deduct the 75%? Your tax and insurance is part of the cost of operating the poperty. You debt service is part also. So to keep it simple (and uniform, thereby earning the title conforming) a Fannie/Freddie lender will calculate your gross net revenues at 75% of lease. Period.
You still have the true positive cash flow. And $30 added to your gross income for qualifing purposes. If you are not qualifing because of that extra $50 you are looking for get creative and re-arrange you debt struture.