How to Include Rental Income for a Mortgage
Obtaining a commercial mortgage loan is challenging, in part because a lender often requires collateral information beyond the value of the real estate being purchased and financed. If the mortgage is for an apartment building or another property designed to be leased, including rental income in the loan application buttresses the financing request. That's why it's important to understand the process of including rental income for a mortgage application.
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Instructions
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Obtain rent ledgers from the current property owner. Try to obtain rent ledgers that go back three years if the current owner kept records that far back. The seller of commercial real estate always provides these ledgers as part of the sales transaction.
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Compute the average occupancy rate for the premises. A key consideration for a lender is whether the occupancy rate is consistent, declining or increasing. Ideally, an overall occupancy rate averages 80 percent over the course of a year.
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Determine the eviction rate associated with the property. Look for evictions undertaken for nonpayment of rent.
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Ascertain the percentage of rent that is past due, if any. Past due rent should not exceed an average of 5 percent of tenants, with an eviction rate being negligible.
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Combine this information into a general worksheet or report for the mortgage lender from which you seek financing for the property.
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Consider permitting the mortgage lender to enter into an agreement with you to put a lien on incoming rent in addition to one on the real estate itself. In other words, agree to permit the mortgage lender to attach the rent payments directly if you fall behind in your own mortgage payments to the lender. This additional collateral makes a lender more likely to do business with you.
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Tips & Warnings
Consider engaging the services of a commercial mortgage broker to assist you in finding the most favorable financing. A commercial mortgage broker does not charge you for services. Rather, this type of professional is paid by a lender who ends up contracting with you for financing.
If you want to purchase property with a poor track record, be prepared to have a concrete plan to eliminate slow-paying tenants or boost occupancy, as the case requires. In the alternative, advise the mortgage lender that you propose a different use for the premises that will generate more income.
