Would a rental property cause issues with purchasing a home in a few years?

I own an apartment with my wife in Brooklyn.  Due to my job location, in the next four to five years we might move out to Connecticut and hope to purchase a home. My hope was to rent out my current apartment at that time.  Right now, a friend and I are looking into buying a 1 bedroom apt in Brooklyn to rent out.  Would this cause issues in a few years due to already having two properties or is this not an issue because they both would then be rental properties? Does setting it up within a LLC help separate “personal” and “investment property” ownership? Bonus question:  How does the bank loan process work differently for a potential rental property versus a personal dwelling?  I would assume something along these lines would be incredibly common the ramifications would be well known. Any guidance would be much appreciated.  Bonus x2: Are there any guide books for rental property specifically crafted around NYC? Thanks!

tylerderden1211

in Landlord 13 years and 5 months ago

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ejalbk | 13 years and 5 months ago

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With regard to your IRR calculations, since 11% is your low end, I assume that figure posits zero appreciation and as such it sounds awfully high unless you are taking financing into account but without knowing rates that’s difficult to do.

tylerderden1211 | 13 years and 5 months ago

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I wasn’t assuming banks would care about IRR at all. I get everyone’s point that it comes down to cash flow. Makes full sense to me and points to that it doesn’t matter if I have X amount of mortgages outstanding as long as I’ve got the rental stream to offset it.  Thanks.

daveinbedstuy | 13 years and 5 months ago

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banks don’t care about your assumptions on IRR.  All they care about is cash flow and debt levels.

Bklnite | 13 years and 5 months ago

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The thing that might be a factor is debt to income ratio. Before lending you money on a house a bank will look at all your debt (mortgages on rental properties, and any other debt – credit card, car, studentloan) and figure out if your total income is sufficient to cover the total debt with the new loan. For rental property I believe they’ll look at cash flow (income – expenses) not your IRR forecast which assumes you’ll eventually sell at an appreciated price. For tax purposes your rental income may be zero after depreciation.

ejalbk | 13 years and 5 months ago

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If the apartment is clearly cash flow poistive the bank may see it as a mild net positive. What sort of cash on cash return are you projecting?

daveinbedstuy | 13 years and 5 months ago

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Well, Adam Dahill is a good brokjer and gets a lot of recommendations here.  All of this will be subject to the lender’s requirements of debt/income, coverage ratios, etc, etc, etc.  These are not unusual scenarios.  Many people have second homes or investment properties.

ppwest | 13 years and 5 months ago

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thanks for the question, commenters, any mortgage broker recommendations that specialize in this? I’m sure some brokers are more experienced in this area than other… Using an LLC for one person doesn’t affect much [because it’s just added to your income] but protects you from lawsuits… not sure about 2 person LLC’s…

daveinbedstuy | 13 years and 5 months ago

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Not sure what issues you are thinking about.  if it’s a mortgage, all they might do is discount the rental income a bit in your statement of what your income is.  However, for a rental properrty you will pay a higher interest rate.