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Prior to moving to our current location, my wife and I lived in a one bedroom condo. We continue to own the condo, owing about $80k on it. We get enough rental income that we make a profit after condo fees, management fees, and mortgage interest.

Now we own a larger home and we are looking to move. A big part of me is tempted to become a landlord again. However, we owe substantially more on the property (like $370k). We are not under water. We could sell and either break even or make a little money. However, selling seems expensive after you take into account 6% realtor fees, potentially paying for someones closing costs, etc.

So I'm tempted to rent it out, again. I'd be the landlord of two properties. However, where we will be moving I'd like to buy a home eventually. Will owning these two properties with mortgages on them interfere with my ability to get financing for another home? Would I be seen as overextended? Or would the fact that rent is covering these mortgages mean I could still get financing on a third home?

Also am I just over exposing myself and my family to excess risk? A little condo is one thing, a home where we owe twice as much as our yearly income is another.

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2 Answers 2

Even after the real estate crash, there are banks that lend money outside of the rules I'll share.

A fully qualified mortgage is typically run at debt to income ratios of 28/36, where 28% of your gross monthly income can apply to the mortgage, property tax, and insurance, and the 36% is the total monthly debt (including the mortgage, etc) plus car loan student loan, etc. It's less about the total loan on the potential than about these ratios. The bank may allow for 75% of monthly rent so until rentals are running at a profit, they may seem a loss, even while just breaking even. This is just an overview, each bank may vary a bit.

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is correct about banks typically only taking 75% of rents (allowing for vacancies, etc). In addition to actual (active) income (or losses) the banks will also consider the passive losses. For instance, if you depreciate the rental properties, which is a great tax benefit, that depreciation will be deducted from your income in calculating the ratios even through it is a passive loss (i.e. it didn't actually cost you money). –  Jerry Fernholz Aug 3 '14 at 22:37

There's a couple issues to consider:

Capital Gain Exclusion

When you sell your primary home, the IRS gives you a $500k exemption (married, filing jointly) on gain. If you decide not to sell your current house now, and you subsequently fall outside the ownership/use tests, then you may owe taxes on any gains when you sell the house.

Debt/Income Ratios

Rather than being concerned about your net debt, you should be concerned about your monthly debt payments. Generally speaking, you cannot have debt payments of more than 36% of your monthly income. If you can secure a renter for your current property, then you may be able to reach this ratio for your next (third) property.

Also, only 75% of your expected monthly rental income is considered for calculating your 36% number.


(This is not an exhaustive list of risks you expose yourself to).

The largest risk is if you or your spouse find yourself without income (e.g. lost job, accident/injury, no renter), then you may be hurting to make your monthly debt payments. You will need to be confident that you can pay all your debts. A good rule that I hear is having the ability to pay 6 months worth of debt. This may not necessarily mean having 6 months worth of cash on hand, but access to that money through personal lines of credit, borrowing against assets, selling stocks/investments, etc.

You also want to make sure that your insurance policies fully cover you in the event that a tenet sues you, damages property, etc. You also don't want to face a situation where you are sued because of discrimination. Hiring a property management company to take care of these things may be a good peace-of-mind.

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+1 - Welcome to Money.SE. Good points, although the first is somewhat moot as OP states they are near break-even. –  JoeTaxpayer Feb 3 at 22:31
@JoeTaxpayer I guess it depends on what they are breaking even with. If they mean the loan, then yeah, that makes sense. I interpreted that as break even with their initial purchase price, which could result in taxes if there is a gain. Taxes are taxes, no matter how small! –  Nick2253 Feb 4 at 0:00
"We are not under water. We could sell and either break even or make a little money." - Say it's a $400K house. They are thinking to avoid a 6% realtor fee. $24K. I don't know what "a little" means. $10K? $20K? You see how tough it is to really address a question 100% without the specifics. –  JoeTaxpayer Feb 4 at 0:44

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