80% Rental Offset Calculation

80% Rental Offset Calculation

NOTE: The 80% rental offset previously offered to calculate debt load on rental properties changed as of April 2010. Now, rental properties that are not the subject of the mortgage are close to 100% rental offset. 100% rental income less PITH (Principle, interest, property taxes, heat and condo fees) on the property. Rental properties that are subject of the mortgage can only use 50% of the rental income to qualify. However, property taxes, heat and 50% of condo fees can also be excluded.

How To Buy Multiple investment Properties

Have you ever wondered how an individual (or a couple) who earns $60,000 per year can afford to buy 3 properties worth over $675,000?

The key is how the mortgage lenders calculate the rental property income. Some lenders will take 50% of the rental income and add it to your annual income and then include the full carrying costs of the new mortgage into your debt.

Other lenders will use what is called an 80% rental offset. Using this method, the carrying costs are reduced by 80% of the rental income. The way the rental income is treated is what will make a huge difference when trying to obtain multiple mortgages.

How is an 80% rental offset calculated?

Principle + Interest + Taxes – 80% of Gross Rental Income = X

If X is less than the carrying costs, the remainder is added to the debt. If X is greater than the carrying costs, the remainder is added to the income!

Here is an example of the different results obtained using the two different methods.

Our Client:

$60,000 annual salary
$1400 per month in primary residence carrying costs
$1400 per month in carrying costs of the rental property
$1400 per month charged in rent
Max TDS (Total Debt Service Ratio) = 42%
In this case our client could service $2100 per month in debt

The Properties:

All properties have a value of $225,000 and were purchased with 5% down

The interest rate used for all mortgages is 5%

The amortization period for all mortgages is 35 years

A CMHC premium of 3.15% was added to the mortgage of the clients primary residence

A CMHC premium of 6.90% was added to the mortgage of the clients rental properties

50% rental income added to income

The clients income using the 50% rental income will go up to $68,400 per year. The clients monthly expenses will rise to $2800 per month. This debt load exceeds the $2394 per month permitted by his new TDS ratio (using the higher income amount). Using this calculation this client would not qualify for a rental property even with the additional income.

Using our 80% rental offset calculation

Principle + Interest + Taxes – 80% of Gross Rental Income = X

So in our above case it would be:

$1400 – $1120 (80% of $1400) = $280 (will be added to the monthly debt load)

The clients income would remain at $60,000 per year. The clients monthly expenses rise to only $1780 per month, not $2800! Not only would the client qualify for a rental property, they would actually qualify for 2 rental properties!

The clients monthly debt obligations of $1960 (primary residence ($1400) + rental 1 ($280) + rental 2 ($280)) is less then his maximum total debt service ratio of $2100 per month.

Please feel free to call me or apply online if you would like to discuss the purchase of rental properties.