How to Calculate Rental Income a Quick Guide
Looking for an easy and accurate way to calculate rental income? The Blink Lending team here in Houston has you covered. Read on for the easiest way to calculate your rental income.
Most real estate investors report their rental income on Schedule E of their 1040 US Individual Income Tax Return. As a mortgage lender we often have to determine the usable rental income for your properties.
You may feel they are very profitable, but once we put our math to it, the reality may be quite different, so it’s important we share how this is calculated and get on the same page.
The first thing we have to determine when calculating rental income is how much of the year was the property available for rent. Did you purchase the home in the middle of the year that it is reported on your schedule E or did a tenant make a mess of things and you had to do repairs and maybe even new construction that took a decent amount of time?
The first and most important detail when filing schedule E income is properly reporting Fair Rental Days on Line 2 part A, B, or C. This number needs to represent the actual days the property was available for rent so if you had to do repairs to the home and they took two months, make sure that you report 305 days as the Fair Rental Days.
As with self-employed income, there are expenses that we add to your gross rental income and nothing gets deducted from your gross rental. Our calculation starts with LINE 3 Rents Received then we add back LINE 9 Insurance, next we add LINE 12 Mortgage Interest Paid to Banks, then we add back LINE 16 Taxes and finally we add LINE 18 Depreciation.
The result is a new gross rental dollar amount. Then we take LINE 20 and deduct it from the new gross rental dollar amount, which gives us a net rental income that will be compared to your mortgage payment, if you have one, or from the taxes and insurance if the home is owned Free & Clear.
Onetime Expenses
In addition to the calculation above, we are also able to add back onetime expenses. Onetime expenses are typically utilized on LINE 14 repairs. In order to take advantage of these, we would need your rehab quote and the receipts for the expenses. Please keep in mind that onetime expenses are not maintenance items like flooring and paint, they are generally in the form of large ticket items like air conditioners, water heaters, roofs, & other large ticket appliances. If you aren’t sure what constitutes a onetime expense, please reach out to us and let us help you.
Remember that properties that are purchased after the last tax returns filed with the IRS are subject to different rental calculation, which we will cover soon to help you.
Check out our Blink Lending TV YouTube page to see our video showing a sample of the numbers or give us a call at 713.462.5465 to let us walk you through this process.
