Investing in rental property - The loan application and the balance sheet

You are wanting to invest in rental property and you are applying for a loan using the standard loan application.

The loan officer hands you a Fannie Mae-1003 loan application. Most mortgage loan officers will help you fill out the application however it is important to understand what some of it means. Most of it is general information about yourself that is self explanatory such as your name, date of birth, and your place of employment. However, the balance sheet portion of the application (page 3) can be the most difficult to understand but one of the most critical. This is the portion that asks for assets and liabilities. The purpose of this portion of the loan application is to take a “snap-shot” look at the borrower’s financial condition and determine their whether they are financially sound enough to take on more debt. So what are assets and liabilities.

Assets are basically anything you own that is considered to have value. On the balance sheet, assets are on the left and liabilities on the right. On the asset side, it will ask for a subtotal of liquid assets. So what are liquid assets? Liquid assets are assets that can easily be converted to cash or are equivalent to cash such as bank accounts, stocks and bonds, as well as the cash value of a life insurance policy. On the life insurance, most people have a hard time understanding that only a whole life policy has any cash value and the existing cash value is what is put in this column. The face value of a term-life policy would not be listed as an asset because this asset would only be recognized if you died and the policy was honored.

As you go down the asset side of the balance sheet towards the bottom, it asks for real estate, retirement funds, net worth of a business, as well as personal property such as autos. Under real estate you would list the total value of all real estate owned which would consist of your homestead as well as any other investment property that you may own. There is a table at the bottom of the page of the loan application that asks for more detailed information on your real estate and should be completed to help with this part of the balance sheet.

Vested interest in your retirement fund would be the balance that you are actually eligible to take out of a 401k or a similar plan. This may or may not include any employer matches and will likely be determined by the length of time you have been in the plan. Net worth of businesses owned is the actual net equity that you have as an owner in a corporation or another entity. If you are a 50% partner in a business then half of the net worth of the business would be yours and that amount would be put in the column.
Automobiles is the next item and consists of the current value of all automobiles you currently own. At the bottom it will ask for other assets. In this category you list the value of all household and personal property such as furniture, equipment, tools, and anything that you would consider to have some value. When all categories are added up, the total is what you have or own in total assets.

On the liabilities portion of the balance sheet, or the right side, the first several spaces asks for the name of the creditor, the monthly payments with the amount of months left as well as the unpaid balance of any notes. This consists of your vehicle loans, credit cards, as well as any mortgage payments you may have. Once these are added up, this reflects your total debt. Your net worth is determined by subtracting your liabilities from your assets. The higher your net worth the better. If you will notice Alimony and job-related expenses are shown as payments and considered in your monthly payments and cash flow but are not necessarily considered a liability and therefore are not considered in the unpaid balance portion of the liabilities.

The balance sheet that is on the application is a very basic form and balance sheets can be far more complex with much more detail. However, the above are the basics and usually cover most people that are applying for credit. If you borrow money to purchase a home or investment property you will likely always fill this same application out each time. As I stated, a good mortgage loan officer will help you with most of it and in some cases do most of the work with your information provided but it is always good practice to understand what it is and why they are asking for it.

Investing in Rental Property for the Amateur Buyer.


Your 401K doesn’t look as good as it did and you are looking for an alternative investment besides Wall Street. Maybe you’re thinking of real estate? Maybe investing in rental property?...

Rental property is often a great investment with great long term rewards but for the amateur investor there are some things to consider before purchasing that first property. First of all, if you are new at investing in rental property you are going to leverage yourself for the purchase, the thing to consider is all of the factors involved and in particular the risk of debt.

Often times the mistake that people make when they invest in rental property is that they purchase property with expectations that they will make extra money each month from the rent and therefore immediately see a return on their investment. Sometimes it works but this depends upon how much equity you inject into the deal up front, what type of rental market you are in, and the terms you are able to finance the property. Every market is somewhat different and the rent often times is just enough to break even.

It is important to understand that the terms of the financing often dictate whether a transaction is feasible or not. If the payments are too high, you have to be prepared to “feed” the deal every month. This basically defeats the purpose of investing in rental property and holding it long term. In some rural areas that are economically deprived, the rent base is often low because wages are lower and it is harder to make a rental property actually pay for itself and have any extra cash each month. With this said, you may not be able to get an immediate return each month and will have to hold the property for a while and recognize your return at a later date in the form of equity built into the deal and appreciation. How long should you hold the rental property? That depends upon how fast the property appreciates in value, and the equity your renter builds into the property for you. In some markets, houses in particular appreciate rapidly if there is a lot of growth and demand for housing. The higher the appreciation, and the better the financing terms, the faster the renter builds equity in the property for you and the faster you recognize a profit. There are tools available to help you with calculating your payments on many websites. In an ideal situation you have created somewhat of a savings account for yourself when you eventually sell the property. It will work, but it is important to know all the factors involved.

Investing in rental property is a great way to add money to your pocket and restore laughter to your checking account.