Lease property to wife who would sublet.Viable for rental income?

Question

Example: If I buy a 4bedroom property that has a market rent rate of $750 and have a rental lease agreement to my wife for $1,000 who then sublets each individual room for $250 each totaling $1,000, would the initial $1,000 lease count 75% of that as income (so $750) towards my income for DTI purposes on future properties? Or would they only count 75% of $750 because that is the market rent rate and mine is too high.

I make more money renting each room individually but I know lenders won't count that as income, so wondering if I can have the "master lease" that allows subletting would be a viable method, but use my wife or friend instead of property management, because I doubt any property management would work in that capacity of renting individual rooms, at least not for cheap.

Also for clarification, the wife or friend would literally manage it. They would receive the rent monies from tenants then passing it to me. The wife/friend fulfilling their subleases to receive individual rent money and then fulfilling master lease by giving me the money.

Roy N. · Answer

@Richard Ladenberg

Our student house is essentially a duplex as it has two levels, each with their own kitchen, washroom and 4-bedrooms.   Then we purchased it, we did so as a second residence and there was no reliance on the rental income ... we did this to avoid the dancing with several lenders before finding one who would underwrite a student rooming house.  Having my sister-in-law live in the house was key to the manner in which it was purchased ... and is even more key to the smooth operation of the house.

We have since used the rental income from that property during the purchase of other properties.  The scenario typically plays out as follows:

• We report to the lender what we are earning for rent (and provide leases when requested); 
• The lender usually says the amount we are earning is over market and not sustainable;
• They then attribute market rent to each unit of the house and include that amount at 50% - 70% depending on their inclusion rate.

The first time it happened, I try to make the case for including the actual rent and the lender countered that they could attribute market rent or strike the property's income (but not its debt) from their calculations.

Now, Canadian lenders are traditionally more conservative in their underwriting practices than those in the U.S.A., so you may be fine getting a lender to consider your actual rent on the property.

Richard Ladenberg · Answer

@Roy N.

Thank you for the reply Roy. Yes that is basically my plan. Furnished rooms to students and travelling workers. And it's what I've been doing in my current owner-occupied, so I have the proven method and tax returns for it.

Now are they only counting your market rent because the Den Mother lives in there? Or did you dial for dollars until someone would count your property as "2 units"? And even then they only counted the market rate, since what I'm assuming is you making a lot more than maket rate. If I don't have a basement but have a first floor and 2nd floor would that count as "2 units"?

And in your last paragraph, are you saying I should tell them I'm renting room-to-room but would like the market rate rent for the property to be assigned even though I make way more?

Roy N. · Answer

@Richard Ladenberg

That sounds to convoluted and, if unravelled, might appear to a lender as you are trying to hided something or game the system.

We have a student rooming house where we rent furnished rooms to predominately international students.  My sister-in-law is a co-owner of this property, lives on site and functions as the Den Mother keeping the place in-order.

As you mentioned in your post, lenders are not warm-and-fuzzy about a renting by the room (even though we use written leases).  In our case, it would be possible to rent the upper and lower portion of the house as separate units (main house and basement apartment), and lenders were willing to attribute market rent for both parts of the house (even if it was 25% less) when calculating DTI on subsequent properties.

Try talking to lenders based on the market rate for a 4-bedroom house (or a house with separate basement apartment if so setup) and see if they will assign a market rent.