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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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1 Answer 1

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

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