If you own title to a residential rental property via an LLC (“limited liability company”), then you better have owned this asset for at least 24 months and reported it on Schedule E of your 1040 tax return – otherwise you will have a tough time utilizing the income from this property to qualify for a loan. Without the 24-month seasoning period, there is a good chance the net rental income cannot be used in calculating your Debt-to-Income ratio (DTI) unless you elect to transfer title from the LLC to your individual name.
Now don’t rush out and transfer the ownership from the LLC to yourself personally without first consulting with your accountant and lawyer – especially because of the potential tax ramifications and liability risks. But you won’t get conventional residential financing for your LLC rental property, because the lender will treat it as if it were a commercial property (which means lower LTV requirements and higher pricing – even if you personally guarantee the loan).
On the other hand, if title is in your name, then typically 100% of the income and expenses on Schedule E can be used to calculate your DTI – without having to comply with the 24-month rule. In addition, if the property is so new that it has not yet been reported on your previous tax return, then some lenders will allow you to use 75% of the revenue (confirmed via the lease) less PITI, with only 75% used to account for other standard expenses you will incur.
Let’s say you buy a residential investment property for $150,000 using cash. You fully expect to get a renter, but first need to make some improvements to the property. So, being as smart as you are, you postpone financing the property because you should undoubtedly be able to get higher loan proceeds after you enhance value to $200,000 – right? Most lenders will not advance more than 75% of the original purchase price for the “Cash-Out Refinancing” of investment properties – until at least 12 months after the purchase. This means that you cannot get a loan based on value during that time frame, unless you obtain the loan from a “portfolio” lender (a lender who can maintain the loan on their own books without either selling it to FNMA or having it guaranteed by FHA). Nothing wrong with getting a portfolio loan, but they are oftentimes more expensive.
The government enforced this idea in order to prevent the flipping of homes. Before the housing crisis, investors were bidding up the price of homes via quick cash closings, only to turn around and either quickly selling for a higher price or financing virtually 100% of the price right after closing (there were several lending programs that made it easy for them to do so). Thus, the government wanted to prevent NON-owner occupant borrowers from continuing the same flipping practices – mainly in order to avoid purchasing or guaranteeing a loan secured by properties with inflated values.