Depending on where you live you’ve may have noticed how the real estate market is a bit inflated right now but there are still some good rental properties that would be perfect for investment. When you know the facts and find the right deal then investing in rental property can be lucrative. Below you’ll find some helpful tips and information that gives you the tools to make a sound decision before you invest in rental property. So, you want to know How Can I Buy a Rental Investment Property?, here are some key takeaways…
- Investing in rental property can be lucrative, but it can come with many challenges
- Borrowers usually need to secure at least a 20% down payment for a rental property mortgage
- Being a landlord requires a broad array of skills, from understanding basic tenant law to fixing a leaky faucet.
- Experts recommend having a financial cushion in case you don’t rent out the property, or if the rental income doesn’t cover the mortgage
Am I Ready to Be a Landlord for Rental Properties?
There are a lot of skills and time requirements to being a successful landlord. Some are good and some are downright unlikeable. The fact is that you can earn a good income if your rental property/ies have what it takes to attract good reliable tenants.
What Kind of Rental Do I Want?
You need to ask yourself “Do I want to own student university apartments or high-end holiday lets?” Of course, it depends on your budget but either way both can come with their own potential set of headaches.
Unfortunately, renters don’t always take the kind of care with a rental that they would with their own home. So not only do you need to find a unit that’s a good investment and then prepare it for rental but you have to find tenants that won’t trash the place or run you ragged with requests and demands.
What Kind Of Help Should I Consider for My Rental Property?
Some landlords hire a property manager to oversee rentals and maintenance but this can be costly 6-18% of rental income. If you’re happy to collects rents and know how to make your own repairs that can mean BIG savings.
The problem is that you’ll be on call for problems and that can get old. Perhaps you’ll want to start out doing the maintenance and see how it goes.
How Much More Work is Entailed If I Have More Than One Property?
Making your own repairs is fine if you own 1-2 properties but if you’re building a portfolio of rental units then you’ll need to begin gathering a crew that can swoop in and take care of issues when they come up. Separate teams to take care of repairs, cleaning and painting/decorating would come in handy.
Think long and hard if you have no DIY skills and/or extra cash for emergency repairs that may crop up. If you’re not the handy type and don’t have much spare cash, being a landlord may not be right for you.
Can I Afford an Investment Property?
This is an important questions. Do you currently have debt or will you take on any big debts soon? If you’re still paying off student loans, medical expenses or need to send a child to university soon, taking on more debt for investing purposes might not be smart. Having said that, some parents buy rental property in the university town their child will be living. Their child gets to live there during university along with roommates whose rent covers the mortgage payments. That way the large cost of university housing becomes a savvy investment.
If you already have a high debt-to-income ratio, getting loan approval could be difficult or even impossible.
Do the income forecasting. If you can earn more on rent than the total of: mortgage payments, cleaning, maintenance, apartment dues, taxes and etc. then this could be a good investment. Just make sure you have the available cash to cover your expenses and pay your mortgage. Defaulting on your mortgage could mean you lose the investment property and damage your credit history.
Do I Need a Large Down Payment for Rental Investments?
Yes. Usually the down payment for a rental Investment is higher than one for a property you’d live in. Plus, the approval requirements are tougher. That single digit down payment you made on your personal home becomes double-digits for rental investments, at around 20%. This is because there is no mortgage insurance for properties you buy to let. If you can’t swing the 20% using only savings, you could take out a personal loan or payday loan for the down payment.
Is The Saying ‘Location, Location, Location’ True for Rental Investments?
Yes, Yes and Yes! Do your research before you consider buying. Obviously, you want the highest return on investment possible and the neighborhood you choose can make a big difference on what renters you attract and how well you make out when you sell. University towns are usually a good bet as universities aren’t going anywhere.
Don’t be caught out because you don’t do your research. Wander around the neighborhood. Does it have a good vibe with convenient shops and amenities? Is it trendy and on it’s way up or is it looking downtrodden? Look for a good school system and low property taxes because these attract stable families. What’s the situation with crime, public transportation and how about a thriving job market? Check those out too.
While the investment that you would make on your personal home would more than likely be more involved and costly, read 9 Best Home Improvements With Great Returns on Investment to get some ideas of what would pay off in terms of repairs and upgrades.
Should I Use Financing or Savings to Buy Rental Property?
Good question. This can depend on your goals and what kind of ROI you’re going for. A good estate agent should be able to help you figure out the costs and the advantages of using your savings vs financing your purchase. They can put you in contact with mortgage companies that can help you do the calculations of financing as well. If you have a financial advisor, run the numbers past them too. Remember to include all potential costs, taxes, as well as depreciation and any breaks you may get on rental properties.
How Can I Get a Rental Property Mortgage?
Keep in mind that the interest rates for a second property (not your primary residence) are generally higher. One big reason for this is that homeowner mortgage company assume that if you have financial troubles you would pay off your home mortgage before your rental mortgage. For that reason, they charge higher rates to cover their costs as a form of protection against potential loan defaults.
Aside from the higher interest rates, most other aspects of taking out a rental mortgage are very similar to a residential mortgage. For instance, just like a residential mortgage, lenders look at your credit score, how much you can put down and your debt-to-income (DTI) ratio.
Having said that, their thresholds are more strict for rental property. They look for a lower DTI, larger down payment and a better credit score. Other factors that come into play are your job situation and history and whether you’ve successfully managed rental property before or have been a landlord.
One other important factor for rental loan approval is showing that you have enough money to cover 3-6 months of these expenses:
- mortgage payments (that includes principal and interest)
If I Have a Great Credit Score Will I Still Have to Pay Higher Interest Rates?
Most likely. That’s the nature of the beast and the market! Having said that, even though the rates for rental property are higher, you may be offered the lower end of the that scale of higher rates. Let me put it another way. With a bad credit score you would definitely be offered the highest rates because a bad credit score says you’re not the best lending risk. Lenders may offer you a smaller loan too or turn you down altogether if your credit score is very low.
Become familiar with your credit score and check it at least once a year. Keep an eye on your credit history too to catch and correct any errors.
How Do I Figure Out How Much Profit I Could Make?
When tallying up your potential expenses, fill out a spreadsheet with every conceivable expense including maintenance, insurance, apartment or home association fees, yard maintenance, repairs, appliance replacement insurance, fixing up the property, property taxes, etc..
Do I Have to Buy Landlord Insurance?
Its just plain smart to get insurance. Make sure your insurance covers rental default. If your tenants disappear in the night you could be financially vulnerable.
In fact, many mortgage companies require proof of insurance in order to lend to you. This keeps your investment safe. It can cover damage to the property either from things like violent weather or water damage due to a leak even tenant damage above and beyond normal wear and tear.
One important tip: If you end up renting out your own home remember that most homeowners policies will not cover damage incurred with renters in your home. Check this with your insurance company to be sure. Also, ask them about bundling your insurance policies (i.e. homeowners and rental insurance) to get a break on your rates.
Do your homework before investing. Take time to list and estimate all the expenses you could have with a rental property. Choose a great location and decide how much ROI you’re looking for. If you currently have debt you may want to clear that before you invest to increase your chances of getting loan approval at favorable rates.