Planning on buying a home for rental or investment purpose? There are certain things you should know about the financing process. It’s a little bit different than buying a home you’re going to occupy so it’s important to know the terms, the rates, credit scores, and all factors involved when you’re financing your first rental property.
#1. Are you ready to become a landlord?
It’s important to check out the market in the area in which you are considering. Find a real estate agent that is well-versed in investment purchases. You don’t want a novice real estate agent or someone that is not familiar with the rental market or rental properties. Rental markets change from neighborhood to neighborhood so it’s important to go with an agent that understands the market and knows the micro-neighborhoods of the community so you can choose the best property for long-term success.
#2. Your income.
There are two main components of real estate investing, long-term appreciation and monthly cash flow. The property will tend to appreciate over time but at the same time, you can gain monthly cash flow from renters. This is a great investment but you want to make sure that your income from the property is enough to cover the expenses of owning the property as well as providing extra income or profit.
#3. Interest rates.
Lenders will view non-occupied properties at a greater risk than your primary home. They understand that keeping your primary residence is more important than a rental and if you come into financial trouble, you’re more likely to let the rental go then your own home. So, to offset this risk, lenders will inflict higher interest rates. They won’t be tremendously higher but it is something to be aware of. This could bring you anywhere from .5 to 1% higher than an owner-occupied property.
#4. Your down payment.
Similarly to interest rates, lenders will require a higher down payment. You’ll want to prepare for about a 20% down payment for a conventional loan and with a higher down payment, you can get better interest rates and terms. Feel free to talk to me about all the different options when it comes to getting the best loan and rate for a rental property.
#5. Vacancy factor.
It’s easy to assume that as soon as you by a rental property you will start to generate rental income, but that’s not always the case. If the property is vacant for a couple of months or a tenant has destroyed the property and you need to spend money and time bringing it back up to livable status, that’s a loss in income and lenders will take into consideration the vacancy factor. However, lenders understand this condition and will typically put in clauses to offset any vacancy issues.
Give me a call today for more information on applying for a rental loan or an investment loan and let’s talk about your options. There are several great programs right now and rates are still low.
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