Sunday, 09 December 2018
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This Old House - Do-it-Yourself

Buying a Rental Property? Here’s What You Can Expect

Written by Posted On Tuesday, 09 October 2018 06:00

If you run across someone who owns multiple rental properties, it’s very possible that individual never intended to own so many. In addition, those who own a rental property might also be “accidental” landlords after having inherited a property or renting out their current home while buying another.

Real estate investors can often find themselves quitting their current job and buying and renting real estate full time. Real estate is an asset that can both appreciate in value while at the same time providing a monthly cash flow. You’d be hard pressed to think of any other physical asset that can do that. So why is not uncommon to meet someone who owns several rentals? It might very well be due to qualifying for a mortgage to buy and finance an investment property.

Conventional financing will ask for a down payment of at least 20 percent of the sales price and with a 25 percent down payment the terms get a little better. Interest rates for rentals are slightly higher compared to an owner occupied property. Investors have the choice of both fixed and adjustable rate mortgages ranging in terms from 10 to 30 years. But with the first rental being purchased, the buyers don’t benefit from the income derived from the rental when qualifying. Instead, the buyers must qualify based upon the new mortgage payment, including property taxes and insurance, without adding rental income into the mix. This is in addition to any current mortgage payment. But all that changes with the next property.

Subsequent purchases of investment real estate do in fact use the income from the rental to help qualify. Investors want to cash flow on their investments each month and if the rents received from a potential investment aren’t enough to cover the new mortgage payment, the investor will likely pass. This means the next rental property is no longer an expense but instead generates monthly income. Who wouldn’t want that type of investment? Yes, property values rise and fall but in time values do rise, contributing to the owner’s equity position. One caveat, you’ll need to own the first rental for at least two years showing you can both manage the property and the unit provided regular income.

Speaking of managing the property, when you become a landlord, you’ll have the occasional tenant issue. Remember when you first rented and the sink disposal went out? Did you go to the appliance store and buy a new one? No. You called the landlord. You can expect the same when you buy your first rental. But when you buy your next one and the next one you might want to think about hiring a property manager to take care of these issues for you.

You can think of your first rental as a learning experience. But once you’ve owned that first rental for a couple of years, don’t be surprised if you start shopping for your second.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending.

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country.

Reed was the former Technology Chair for the Texas Mortgage Bankers Association, Board Member and President of the Austin Mortgage Bankers Association. He is married and a father of three in Austin.

www.cdreed.com

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