Thinking of an investment property home loan? At first, buying your first rental property may sound like an easy income source – well in many cases, that exactly happens. However, buying a rental property requires a lot such as being knowledgeable in terms of mortgage property loans, leasing, relationships of tenant and landlord, and property management. Purchasing rental property can be expensive, but, just like any other investments, it comes with benefits and challenges.
Rental Property Owners
The owners of an investment property have an option to manage their own property or just hire someone called property manager. A property manager may be costly because of their charges – between 8% and 12% of collected rents; but they provide a huge relief to rental property owners. Property managers provide a myriad of services that include maintenance and repair work, new tenants screening, and late payments management.
Apart from the abovementioned, investment property home loan owners also need to be aware of the laws between the landlord and tenant. The landlord-tenant laws may vary depending on the state and locale of the rental property. Both parties will have a right and obligation in terms of lease, deposits, eviction rules, and fair housing rules.
While putting up the investment property, keep in mind that it is very important to protect it. One way to do it is through a landlord insurance. This type of insurance for investment property can cover damages, lost rental income, and liability protection in case the tenant/visitor suffers an injury resulting to property maintenance issues.
Buying an Investment Property Home
Location
Below are some of the most important factors to keep in mind when finding the right location for investment property.
- Crime Rates – A city or locale with a low crime rate presents a good ideal place for tenants. A neighborhood with a high crime rate may bring additional challenges, sacrificing the security of your future tenants.
- Rental-to-ownership Ratio – There may not be enough interest in rental units to justify your purchase if most of the houses in the neighborhoods are owner-occupied.
- Vacancy Rates – A location with high vacancy rates may make it more challenging for you to attract tenants. It could require you to spend more just to make the investment property home more appealing, otherwise making the rent cheaper to get it occupied. The US census can provide information regarding vacancy rates while the city and state governments often track these too.
- Good School District – Tenants also get attracted with the ideas that your rental property has a reputable school. Having good schools in the neighborhood often increase the purchase price of the property.
- Neighborhood Amenities – Are there any projects under development? What parks or other amenities will appeal more to the renters? A commercial business just like grocery store may make it more appealing, while a new hospital can drive more traffic and noise in the neighborhood – resulting to lower interested tenants.
Type of Property
You can start small with single-family home or go big with a multi-family investment property.
- Single Family Home – With this type of rental property, you will most likely deal with one set of tenants and the job would be a lot easier. Single family home is a good first step for first time investment property owners.
- Apartments – Apartments are one type of home property that you can begin investing in with a single unit. However, you should be aware of any co-op or condo board restrictions on rentals as well as local laws applying to all residential rentals.
- Multi-family Properties – Multi-family real estate can include anything from duplexes to complexes with 5, 10, or 100 residences. If you want to go big, multi-family properties have several advantages. Instead of getting ten different loans for ten different homes, you will get one for one establishment. You will be able to handle issues easier in one location rather than in multiple locations.
Investment Property Financing
Like primary home mortgages, the route to obtaining an investment property home loan is identical, with key differences. Because lenders generally demand higher interest rates for rental properties due to higher default rates, investors may acquire a traditional mortgage loan, an FHA loan, or a VA loan. An applicant for rental property mortgage may face more difficult underwriting standards compared to a primary home mortgage applicant. Mortgage lenders will focus more on the credit history, down payment, and debt-to-income ratio. The borrower will likely be required to satisfy higher credit score, DTI standards, and a higher down payment.
Credit Score – 620 as the minimum credit score, with better rates and terms offered with scores of 740 and higher.
Down Payment – The borrowers for an investment property generally have to plan on 15% to 25% down payment.
DTI Ratio – This ratio basically represents the percentage of the mortgage borrower’s monthly income that goes toward your debt. Your lender can allow you to count up to 75% of your expected rental income toward your DTI.
Savings – An equivalent of 3 – 6 months must be able to get covered by your savings to settle mortgage payments. These includes principal, interest, taxes, and insurance.
Rental Property Investment Advantages & Disadvantages
Advantages
- Real estate property is a tangible physical asset.
- Income from rental property is not subject to social security tax.
- Increase in the real estate value means an increase in the investment too.
- Income is passive. At the same time, investors get to earn while working a regular job.
- With investment property loan, the interest may be tax-deductible.
Disadvantages
- Rental income can decrease due to maintenance costs or property management expenses.
- Real estate may take time to sell as it is not a liquid asset.
- The landlord still needs to pay the monthly expenses even if the tenant decided to move out.
- Entry and exit costs can be high.
- The total monthly mortgage loan payment may not be covered by your monthly rental income.
Conclusion
Investing in rental property can be an excellent method to invest, especially when you’re looking for a passive and reliable revenue stream. Being familiar with tenant and landlord laws, leasing, financing, and property management can help you become successful in rental property investment.
