Stories of rehab properties and house-flipping might dominate reality TV, but that’s not the only means of real estate investment. Some homebuyers are looking for a vacation home in an area they like to visit and rent it out for a profit when they’re not in town. Others have the primary goal of housing tenants and dividing a home into a duplex.
No matter your initial mindset, renting generates a steady monthly paycheck along with a bonus of price appreciation. According to Realtor.com, more investor homes, such as condominiums and town homes, are popping up every year. But don’t be tempted by the numbers; choosing the right property, maintaining it, handling tenants and acquiring the funds can take hard work.
Here’s What to Consider:
Make sure it's for you
Like any job, being a landlord requires some fundamental skills. Do you know your way around a tool box? Can you repair drywall, maintain landscape and plumbing? Yes, you can hire someone to do it all, but that will only eat away at your profits. Everyone wants to be a landlord when it’s time to collect the rent, but less so when there is a problem. Be sure this is a side-hustle or primary occupation you can be fully invested in. If you’ve saved up a good-sized emergency fund and can handle any unforeseen issues like things breaking, the unit being unoccupied or the tenant not paying rent, then full speed ahead.
How to Finance
Owning a rental property has many tax benefits, so make sure you speak with your CPA about how it could help you come tax time. One of the best parts of owning a rental property is the financial benefit of tenants helping cover some or possibly all of your monthly mortgage payment. This helps give you more to spend on those unexpected costs or unfinished projects that might be lingering over your head. To get your business off the ground, here are a couple of ways you can finance your investment purchase:
Conventional Compared to hard money loans, conventional mortgages are relatively cheap. In general, you’ll probably pay .5% - 1% more in interest for an investment property over a primary residence. In most cases, investment conventional mortgages require a down payment of 20% for single unit dwellings. For multi-family 2-4 unit dwellings, the down payment is typically 25%. You will want to check with your lender as there could be specific credit score, debt-to-income and reserve requirements.
FHA For first-time investors, FHA mortgages may be the perfect starter kit. To qualify for the generous rates and terms, you must occupy a unit in the building which would qualify the purchase as a primary residence. Because these loans are insured by the government, FHA lenders are able to offer more lenient guidelines in regards to minimum credit scores and down payment amounts. Depending on the situation, you could qualify for a down payment amount as little as 3.5%.
Determine the costs and returns When finding the right location, search for low property taxes, safe neighborhoods, good school districts and plenty of stone’s-throw amenities like parks and restaurants. Once you’ve found a tempting area, look for low-cost homes with less expensive upkeep. Maintaining a well-manicured lawn and nicely painted exterior make for an inviting curb appeal that will entice renters. Realtor.com says the current average price for an investment property is $155,000. Based on the amount you’re spending, the next thing to do is figure out your expenses and the average rent in the neighborhood. Again, make sure you consult with your CPA and put a plan in place before purchasing your first investment property.
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Please feel free to reach out to one of our local-serving loan officers who will help you find the best solution for your situation. We will make the process simple and get you out looking for your first, or tenth, income-producing property quickly!
