Rental Income: Qualifying for a Higher Home Purchase Price
Are you an aspiring landlord? Buying a place with an existing rental unit can be a great way to pay off your mortgage sooner. Rental income can also be a great way to increase your home purchase price.
We look at how lenders treat rental income when you are inheriting an existing tenant or finding a new tenant.
Inheriting an Existing Tenant
The simplest way to include rental income is by buying a place with an existing tenant. With a current tenant, it’s simple to have rental income. You need the tenant to sign a new lease with you, and then the lender should be good to include the rental income.
Most lenders let you include 50% of the rental income. This is to account for the fact that the tenant is renting out less than half of your place and for vacancies, repairs and maintenance, etc.
There are pros and cons to buying a place with an existing tenant. The major pro is that you don’t need to look for a new tenant. The con is that the tenant may be paying below-market rent. Even if they are a good tenant, you could earn a lot more by renting your place out to new tenants.
To include the rental income, the rental unit has to be a separate unit with its entrance, kitchen and bathroom. You usually cannot include the rental income unless the units are physically separated.
Finding a New Tenant
A lot of the time there won’t be an existing tenant and that’s okay. You may still be able to include rental income. You’ll just need to do what is called market rent.
Market rent is when you include rent for a unit not yet rented out. A lot of lenders let you do this. You can include it by ordering what is called a market rent report. This is a report where an appraiser looks for what similar rental units are going for in your neighbourhood and estimates based on this how much your place could be rented for. The market rent report usually costs between $100 and $150.
If you’re able to find a tenant and sign the lease before you move in, some lenders will accept this in lieu of the market rent report.
How the Canadian Mortgage App Can Help
With the Canadian Mortgage App, you can find out how much you could afford with rental income.
Using the Purchase Calculator, you can enter the rental income you anticipate receiving from a tenant to see how much more you could afford to spend on a property. Not sure how much rental income to enter? It’s best to be conservative and estimate on the lower end. Or you can look online.
What are you waiting for? Download the Canadian Mortgage App today to try it out.